Report on Cosmopolis Mill - School of Environmental and Forest ...

Weyerhaeuser's Cosmopolis
Dissolving PulpmilCAn
Investment Opportunity
INTERNATIONAL LLC
2999 John Stevens Way
Hoqulom, WA 98550

INDEX
EXECUTIVE SUMMARY ..........3
MARKETING.............................6
PROCESS ................................26
FIBER .......................................38
COMPETITIVENESS................50
ENVIRONMENTAL ...................66
FINANCIAL ...............................70
ALTERNATIVES .......................90

EXECUTIVE
SUMMARY

LDN, 711 112006
Executive Summary
Findines
The Cosmopolis pulpmill represents an attractive strategic investment opportunity, most
likely for a company committed to serving the rapidly growing Asian viscose and acetate
markets. The mill is a supplier of high quality acetate pulps to large, demanding
Asian acetate customers like Daicel, it is located in an area where it has transportation
wst advantages to large volumes of acceptable quality residual and whole tree wood
chips, it operates in compliance with currently-applicable environmental regulations (and
seems well-equipped to handle likely new regulations), the mill is relatively automated
and in a generally good state of repair and it is advantageously located to economically
serve the fastest growing dissolving pulp markets in Asia.
Concerns
The largest single concern that we have is timing- will we have enough time to find a
qualified buyer before Weyerhaeuser makes the decision to curtail mill operations The
Cosmopolis mill is a very complicated and specialized, relatively low yielding (pulp
volume out versus wood volume in) pulpmill that currently serves a highly differentiated,
global market- the market for acetate tow and fiber. The market for acetate pulp is very
good right now and established competitors, around the world, are busy strengthening
their relative competitive positions. While the Cosmopolis mill is a highly-respected,
proven supplier of these very technically-demanding acetate pulps, it is known to have
high pulp production wsts versus the newer, larger scale, prehydrolized kr& mills,
especially those like Bacel's new mill in the Southern Hemisphere. Furthermore, a
previously idled mill with a similar (albeit, less capable) process, the Port Alice 'Neucel'
mill on the north end of Vancouver Island in British Columbia, is reportedly in the midst
of a $C100 million renovation to enhance its ability to wmpete directly for Cosmopolis'
valuable acetate customers.
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Oovortunities
The global markets for dissolving pulp products like acetate seem to be growing again
and they are moving to Asia. The costs of U.S. surface transportation are climbing
rapidly. These seemingly unrelated trends will likely serve to enhance the relative
competitive position of the Cosmopolis mill in the future. There also appear to be
opportunities to improve the mill's fiber cost, chemicals cost, energy cost and yield. Two
current mill by-products, red liquor that is currently burned for energy recovery and
alkaline extraction liquor (which is currently a mill disposal problem), are potentially
significant sources of incremental revenue. Based upon a preliminary analysis, our team
has concluded that it may be economically feasible to convert the mill's red liquor to
ethanol and to convert the mill's alkaline liquor to a PF resin.
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MARKETING

LDN, 7/5/2006
Summary
Marketing Opportunities for the Cosmopolis Pulp Mill
The Cosmopolis pulpmill is primarily configured to produce acetate grade chemical cellulose
and, while the mill has produced other 'dissolving' pulp grades for market diversification reasons
in the past, we believe acetate continues to be the most promising, long-term market for the mill.
The acetate pulp market occupies a niche position in the much larger chemical cellulose market,
pricing for acetate is normally higher than for other chemical cellulose grades and the acetate
market is forecast to grow at 3 to 3.5% per year over the next five years. It is technically
challenging to produce acetate pulp and the number of wood species that have successfully been
utilized to do so is limited. Western hemlock, the species in greatest abundance in the vicinity of
the Cosmopolis mill and the species upon which the mill's process is primarily based, is one of
the most proven species for acetate end use applications. Acetate, a relatively low yielding pulp
grade, also creates substantial challenges for a 'dissolving' mill's environmental treatment
systems, challenges the Cosmopolis mill has successfblly addressed over the years. For all of
these reasons, while other North American pulp mills capable of producing acetate pulp have
continued to close, the Cosmopolis mill's global, acetate pulp marketshare was close to 25% in
2005. And acetate pulp represented over 90 of the mill's production in that same year.
The continued, very rapid economic growth in Asia, primariily China, growing U.S. railroad
pricing power and higher global petroleum prices all suggest that the Cosmopolis mill's best
future markets are in Asia. The Cosmopolis mill's best, long-term acetate customer has been
Daicel in Japan. Global acetate converting capacity is moving to China and China is also the
fatest growing market for viscose pulp. Viscose pulp, while not the market the Cosmopolis mill
is ideally configured to serve, is the largest, least technically demanding market and a market
that could help diversify the mill's product mix during volatile markets. Longer term, North
American acetate converting capacity will be in the U.S. Southeast. U.S. Class 1 rail rates have
doubled over the past 4 years, the railroads (straining to keep up with very rapid intermodal and
coal volume growth) continue to exercise their pricing power and trucking (the most energy
intensive mode of surface transportation) rates are soaring. These transportation cost/service
disadvantages will make it more and more difficult for the Cosmopolis mill to compete with
Rayonier and Buckeye in serving what remains of the North American acetate market.
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The Cosmopolis mill has long-standing relationships with the major producers of acetate flake
and has developed a family of acetate grades that are well recognized in the industry. Thanks to
the technical requirements of this market, the price structure for this market segment has been
very stable and has not reflected the volatility of the viscose market (as mentioned earlier, the
largest segment in the chemical cellulose arena). This stability and the higher prices for acetate
have permitted Cosmopolis, a small, sulphite mill, to profitability compete in an industry now
dominated by larger scale and presumably more cost-efficient mills. Looking forward, it is
imperative that the mill be acquired by a qualified, presumably Asian buyer in the near fbture, a
buyer that can secure sales agreements with key acetate pulp customers for the remainder of
2006 and more importantly for 2007. A reasonable person would assume that by
AugusffSeptember of this year the Cosrnopolis mill's major customers will have established
long-term purchase agreements with competing mills. This would obviously place the mill in an
untenable financial position.
Overview of Chemical Cellulose Products
Chemical Cellulose (or 'dissolving pulp', as it is sometimes called) is primarily used as a
feedstock in chemical processes to mufacture cellulosic fibers. The majority of chemical
cellulose is consumed in the production of viscose rayon. Smaller end-uses include cellulosic
ethers, microcrystalline cellulose and some non-chemical cellulose applications (such as ground
cellulose which is used as a filler in resin compounds).
Sua~hr vs. Demand
Presently, world chemical cellulose production capacity versus demand is at a 20 year low
because of the closure of many of the older 'dissolving pulp' mills in North America and Europe.
As indicated in the 'World Dissolving Pulp Capacity' exhibit at the end of this section, world
capacity for chemical cellulose peaked in 1980 at approximately 6 million air-dried metric tom
(the industry's standard unit of measure). We estimate that capacity declined to approximately
3.4 million tons in 2005. This decline is attributed to declining demand for viscose rayon and the
virtual disappearance of the cellophane industry as low cost synthetic substitutes were introduced
for both products. Another cause for decline of both chemical pulp demand and capacity was the
collapse of the Soviet Union.
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'The decline in both demand and manufacturing capacity of chemical cellulose during the past 25
years is the outcome of three major trends within the industry. The first is the virtual
disappearance of the cellophane industry in most of the industrialized world as lower cast and
acceptable performance petroleum-based synthetics (polyethylene and polypropylene) now
dominate this market. The second is the shift in viscose rayon production from North America
and Europe to Asia, primarily Indii and China.
This geographic shift of viscose staple fiber production (the highest volume rayon fiber type) has
been accompanied by backward integration into the pulp business by some of the major Asian
chemical cellulose users. The Indian firm Birla has entered into two joint ventures with
Canadian chemical cellulose producer Tembec. They will eventually convert two previously
closed, paper grade mills in Eastem Canada to chemical cellulose production. The Singaporebased
firm Sateri has purchased the Brazilian Bacell mill and is expandiig the mill fiom it's
present capacity of 145,000ADMTIyr to 345,0001ADMTlyr. This mill will reportedly produce
both viscose and acetate grades ftom eucalyptus fiber. The viscose grades pmduced at this mill
will apparently be used to source Sateri rayon mills in Filand and China.
The third trend in the industry has been the decline of chemical cellulose capacity in North
America and Europe (and, apparently also, in the former Soviet Union) and substantial growth in
chemical cellulose capacity in the southern hemisphere. Chemical cellulose producers in the
southern hemisphere have lower wood costs (see table below), lower labor costs and less
restrictive environmental regulations and hence a significantly lower cost basis compared to
existing North American capacity.
Country
Canada
Sweden
USA
Chile
Brazil
Softwood Fiber Growth Rate
1 m3hectardyear
3 m3hectardyear
10-15 m3hectardyear
25m3/hectare/year
3Om3lhectardyear
Source: Ernesto Wagner, Weyefiaeoser,
Western Fomter, MayIJune 2006
I
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In addition to the new chemical cellulose capacity in the southern hemisphere, three Canadian
mills that were previously closed (including the two previously-mentioned Birla-Tembec joint
venture mills) have restarted. One of these mills, the Port Alice mill on the north end of
Vancouver Island in British Columbia, is a hemlock-based sulphite mill that will undoubtedly
attempt to compete directly against the Cosmopolis mill. All of these mills were purchased at
very low prices (one for one Canadian dollar) and Canadian pulpmills tbat have been shutdown
and subsequently restarted typically receive various government subsidies. Whether any or all of
these mills can remain economically viable given shiffing global end use demand and generally
higher North American surface transportation costs is debatable.
The recent industry data indicates that, driven by increasing Asian demand, the world production
of cellulosic fiber is now beginning to increase again. Not surprisingly, this increase in demand
and stronger pricing has prompted a marked increase in announced chemical cellulose
production capacity. Recent announcements include:
Company
Location
Announced New
Capacity
240,000 ADMT
263,000 ADMT
160,000 ADMT
200,000 ADMT
Date
L
Bacell (Sateri)
St. Anne (Bila/Tembec)
Neucell
Saiccor
Bahia, Brazil
Nackawic, N.B.
Port Alice, B.C.
Umkomass, S.A.
2006
2006
2006
2007
In addition to these announced capacity expansions, a recent AF&PA survey identified new
industry debottleneckihg mill projects that could account for a further 200,000ADMTlyr of
chemical cellulose capacity. This "debottleneck& capacity and the 863,000 ADMTIyr of new
or c'restarted" capacity would amount to nearly 1,000,000 ADMT/yr of additional supply or
approximately 25% of the industry capacity identified kt 2005! Will it all happen If past
behavior in the global pulp and paper industry is any indication af future industry behavior, it
could. The result would then be precisely as predicted by the simple economic model of 'perfect
competition'- the highest costflowest quality chemical cellulose mill capacity would be forced to
shutdown until supply once again came back into balance with demand and the least efficient,
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surviving mill just covered its incremental costs. The pulp and paper industry is an industry that
has destroyed massive amounts of shareholder value over the past decade through this type of
behavior and the industry has recently shown more capacity management restraint but this is
very real, very serious risk to a potential new Cosmopolis mill investor.
Chemieal Cellulose Markets
The vast majority of chemical cellulose is used in the manufacture of viscose rayon staple and
yarn. Globally, viscose rayon staple accounts for more than half of the chemical cellulose that is
consumed. After a period of decline, the viscose market has recently experienced a 30/dannum
growth driven by new demand growth in Asia The next largest use of chemical cellulose is for
acetate tow, yam and plastics. This accounts for approximately 15% of world consumption The
other uses of chemical are rather diverse and fragmented.
I Miscellaneous Nitration, MCC 130 110
Grand Total 3758 3494
The market for chemical cellulose pulp used for viscose staple has historically behaved like
commodity markets everywhere- cost based competition and, because each mill has a relative
high (compared to the market size) minimum efficient scale, substantial pricing volatility. This
price volatility, coupled with the lower general prices compared to other grade alternatives, has
driven the production to lower cost mills which are typically in the southern hemisphere.
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The technically capable North American mills have understandably tended to focus their ef5rts
on serving the acetate market. The grades in this market have a high technical component and
tend to be "custom designed" for an individual customer's process. As a consequence of the
technical requirement and the need for consistently high quality, the pricing in this sector has
been higher and more consistent than the viscose market. These market characteristics have
enabled the Cosmopolis mill to remain financially viable while other North American and
European mills have closed over the past few years. As shown in the previous table, 80% of the
acetate market is acetate tow for cigarette filters. In spite of litigation, which has increased
cigarette prices and decreased consumption in the US, global tow demand continues to grow at
the rate of 3-3.5% per year. Tow producers have consolidated production in North America and
Europe and the additional capacity has been added in China (see acetate capacity by region) The
ethers market is higbly fhgmented and is nearly evenly divided between CMC
(carboxyrnethylcellulose) and the non-ionic ethers. Each segment represents about 100,000mt of
annual pulp demand. The CMC industry generally uses lower grade, technically unsophisticated
pulp, pulp that is often close to paper grade quality. The non-ionic grades use more sophisticated
grades and require extensive quafification. Due to the high cost of changing pulp sources,
chemical cellulose suppliers tend to become entrenched and it should be assumed that it would
take considerable time to take marketshare away.
During 2005, Weyerhaeuser announced their intention to close the mill. The company
consequently decided to focus all mill production on acetate grades to fulfill contracts with key
customers prior to the intended shutdown in late 2006. Our team's estimate of the mill's sales
volumes in 2005:
Pulp Grade
Acetate
Molding Compound
MCC
Ethers
Specialty
Total
Estimated 2005 Volume
122,000 ADMT
6,000 ADMT
1,000 ADMT
3,000 ADMT
2,000 ADMT
134,000 ADMT
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We estimate that the 2005 acetate grade sales were distributed as follows:
Customer
Celanese (Canada)
Rhodia (Germany)
Rhodia (U.S.)
Daicel
Voridian
Eastman
Estimated 2005 Volume
24,000 ADMT
12,000 ADMT
6,000 ADMT
55,000 ADMT
20,000 ADMT
5,000 ADMT
We estimate that the average mill net realization for sales of these grades in 2005 was $823/mt.
We also estimated that the mill would choose to run solely on acetate grades until closure final
closure, which we estimate to be about September 2006. During this time period, we estimate
that the mill will sell 105,000 ADMT. We estimated the distribution of sales to be:
I
Daicel
Rhodia (U.S.)
Voridian
Eastman
Total
55,000 AT' '-
-- -
12,000 AL..-.
12,000 ADMT
2,000 ADMT
105,000 ADMT
I
We estimate that the average net mill sales realization in 2006 will be $869/ADMT.
Our Mill Marketing Plan 2006-2010
Pul~ Marketine Assumvtiong
As we constructed a pro-forma marketing plan for the continued operation of the Cosmopolis
mill, the following areas were addressed:
1) GRADE MIX: The number and volume of individual grades.
2) GEOGRAPHIC MIX: The distribution of forecast sales by geography.
3) AVENUE OF SALE: The sales channef(s) for pulp sale (direct or agency sales)
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GRADE MD(: The pro-forma grade mix was determined by grade margins, mill capability.
market demand, competition and the mill's existing customer mix. Over the years, the
consideration of these factors has indicated that the highest profit configuration for the mill
is a dissolving pulp grade mix that is very heavy to acetate grades. The concentration on one
market segment has inherent risks but the continued world wide growth of the market for
acetate tow and the closure of competitive acetate mills has left the Cosmopolis mill with a
secure market share in this grade category.
The announced expansion of equatorial mill capacity, all supposedly producing eucalyptus
acetate grades, poses a serious threat to the older northern hemisphere mills like Cosmopolis
but there may be technical issues that prevent a one-for-one substitution for these long fiber
acetate pulps.
GEOGRAPHIC MIX: This is largely driven by customer profitability and forecast market
conditions. Since acetate market growth is primarily (if not all) in Asia and the mill is
situated close to several large Pacific container ports, the focus of sales growth and
markettbusiness development should be Asia.
AVENUE OF SALE: The avenue of sale is a key factor in the sale of any pulp gradeparticularIy
chemical cellulose. The technical component in the marketing of chemical
cellulose has generally favored the use of a direct sales force in the major markets. Cost is
also an issue. The historical cost of selling thought an agent can be between two and three
percent of the FAS value. We assumed direct sales in North America and Japan.
Pricing Forecasts:
Since Weyerhaeuser would only reveal the macro mill net prices for 2005 and 2006 to our team,
we were obligated to use industry data to reconstruct pricing for individual grades. We
developed forecast pricing and volumes for a 'Pessimistic Case' (strong dollar, rapid competitive
response, new competitive volume surge and delayed resolution of mill's fate) and for an
'Optimistic Case' (weak dollar, slow competitor start-up and prompt resolution of mill fate).
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Oatimistic Case
Key Assumptions
1) The value of the dollar will erode significantly in relationship to other major
currencies.
2) Pt. Alice will have an unsuccessful st@-up and will be incapable of producing a
quality acetate grade for the next several years.
3) Over time eucalyptus will not be able to replace existing grades on a one-for-one
basis for the manufacture of acetate We. Introduction will take 3-5 years.
Pessimistic Case
Key Assumptions
1) The value of the dollar will not weaken in relationship to other major currencies.
2) Pt. Alice will have a successfkl start-up and will be capable of producing a quality
acetate grade withim thii year.
3) Over tirne,(l year or less), eucalyptus will become a major raw material for the
manufacture of acetate flake.
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4) A surge in new chemical cellulose capacity weakens price structure of acetate market in
2008.
Discounts and Freinht:
1) Discounts and allowances:
Daicel-5 %
Rhodia-3%
EastmanNoridian-$ 1001ADMT-2005,4%-2006
Celanese-4%
Nantong-4%
2) Estimated Freight Costs
Daicel- $60/ADMT
Rhodia- $100/ADMT pius transshipment
Eastman- $100/ADMT plus transshipment
Celanese $5O/ADMT:
3) Estimated Agents' Commissions
CPP/PI-I 2%CIF Gross
NantonglWeycell2% Gross
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Ethers-2%CIF Gross
Viscose-2%CIF Gross
KEY SALES VOLUME ASSUMPTIONS
O~timistic Case
1) Mil will run exclusively on acetate grades in 2006 to hlfill outstanding contracts.
If mill runs to September this should amount to 105,000 metric tons. If the mill
should continue running there would be an order deficit in the fourth quarter of
2006 since the contractual commitments for acetate would have been filled
leaving little to run in the latter part of the year.
2) Celanese Edmonton is closing in late 2006 or January 2007. This is a key
customer representing 22-24,000 metric tons of high margin acetate business with
an attractive fieight rate fiom Cosmopolis.
3) Rhodi Germany has secured volume formerly supplied by Cosmopolis from
Attiholtz.
4) Voridian has covered plastic grade requirements from Rayonier.
5) Port Alice to start in early May 2006 and not capable of producing quality acetate
grades for three to four years
6) Bacell starting expansion in second half of 2007. Introductions take one to three
years and are not completely acceptable one-for-one substitutes for present
grades.
7) Assume up to 20,000mt per year of viscose pulp sales to compensate for lost
acetate volume.
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8) Nantong (China) will expand acetate flake production itom 60,000 metric tons to
124,000 metric tons by 2007. This will increase pulp consumption by 40,OOOmt
per year and Cosmopolis sulphite will be qualified.
9) Major customers will have some difficulty replacing the ~osmopolis volume. The
customer having the most difficulty is Daicel.
KEY SALES VOLUME ASSUMPTIONS
Pessimistic Caq
1) Mill will run excIusively on acetate grades in 2006 to fulfill outstanding contracts. If
mill runs to September this should amount to 105,000 metric tons. If the mill should
continue running there would be an order deficit in the fourth quarter of 2006 since
the contractual commitments for acetate would have been tilled leaving little to run in
the latter part of the year.
2) Celanese Edmonton is &&jg in late 2006 or January 2007.This is a key customer
representing 22-24,000 metric tons of high margin acetate business with an attractive
iteight rate.
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3) Rhodi Germany has secured volume formerly supplied by Cosmopolis h m
Attiholtz
4) Voridian covered plastic grade requirements from Rayonier,
5) Port Alice to start in early May. This will be capable of producing quality acetate grades this
year (2006) with Voridian and Daicel as target customers.
6) Bacell starting expansion in second half of 2007. Introductions take one year of less.
6) Nantong (China) will expand acetate flake production from 60,000 metric tons to 124,000
metric tons by 2007. This will increase pulp consumption by 40,000mt per year and
Cosmopolis sulphite will have difficult and lengthy introduction.
7) Major customers will have secured positions with existing suppliers to replace majority of
Cosmopolis volume.
8) To compensate for lost acetate tonnage, assume mill can produce and sell up to
20,000mt of viscose pulp.
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Kev Market Segments:
a) Acetate:
For a relatively small mill, the Cosmopolis mill is uniquely capable of producing acetate
pulp. This capability has evolved over a number of years and has enabled the mill to remain
profitable through a number chemical cellulose market cycles. The heavy focus on acetate
does have some risk but this risk is mitigated to some degree by the mill's reputation for
quality and long-term relationships with major customers. As with viscose, the acetate
market has consolidated and shifted toward Asia. The demand for this market in 2008 is
estimated and shown below:
Estimated Acetate Pulp Consumption by Consumer1 Region
(thousands of air dried metric tons)
North
America
Voridian 190
Western
Europe Japan China Total
190
Daicel
RhodW
Primester 28
Acetate Pd.
Nantong
Acetati
."-------------.-------------------------------
Total 308 106 97 84 595
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As noted, the capacity to consume acetate pulp is concentrated on the east coasts of North
America and Asia (China and Japan). The market growth has been and will continue to be in
Asia. In addition to acetate pulp, much of the North American flake production is also flowing
to Chiia to meet the seemingly ever-growing demand. It is estimated that, for the next five
years, the global growth of acetate tow will be between 3 and 3.5%.
b) Viscose:
The Cosmopolis mill has a limited capability to serve this very volatile and competitive
market. The mill has limited sheet size flexibility and cannot presently make the 60 cm x
80cm required by much of the industry. In addition, the dry end of the machine cannot
currently densifj the pulp sheet to meet most end-user requirements. Previously the mill has
only supplied the domestic cellophane industry which used sheet steeping (where sheet density
was not an issue). The sum total of the foregoing liabilities makes the currently configured mill
uncornpetitive in this market. The need for the mill to produce viscose until such time as it can
be filled with acetate is a financial liability and it gives a strong impetus to k d more attractive
alternatives. The chief concern is that the marketing of viscose would be in the "bid" markets
which most often tend to erode pricing and make it difficult to plan production
c) Ethers:
The entire ethers market represents about 200,000 ADMT of pulp volume. Half of this market
is industrial grade CMC which can use low quality pulp as feedstock. The remainder of the
market represents high quality technical grades of ether used in food stuffs and other quality
sensitive applications. The high quality market is fragmented and represents many customers
and grades but it is very stable and profitable. The Cosmopolis mill spent close to a decade
developing an ether grade for Shinetzu in Japan. The grade in question was a derivative of an
acetate grade and yielded similar margins. To develop a significant volume of specialized
ether grades might take as much as a decade of product development and marketing.
d) Molding Compounds:
The mill developed the grade "PH Sulphite" which became the standard in the industry for the
mamhcture of molding compounds. The mill has robust screening and cleaning capacity and
can meet the stringent cleanliness of this industry. Unfortunately, the molding compound
industry has virtually all moved to Asia with many of Cosmopolii' North American
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competitors closing over the last decade. This grade runs very well in the mill and is more
profitable than viscose.
Conclusion:
The only financially viable course of action for the mill to pursue is to maintain as much of it's
hard won acetate market position as it can. In 2005, we estimate the mill's contractual acetate
position was 122,000ADMT. The closure of one of the mill's major customers, Celanese
Canada, in late 2006 and the loss of Rhodia Germany to Attiholz reduces this contractual base
by approximately 36,000mt. This loss makes the retention of a significant portion of the
present Daicel volume crucial for the mill's financial survivat If Daicel has already secured
most of the Cosmopolis vohune hm
other suppliers on a long- term contractual basis, the
retrieval of this volume would be close to impossible unless the other suppliers are unable to
perform on their contracts.
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World Dissolving Pulp Capacity
IS60 1860 $970 1980 1990 2000 2006 2010
CompanylLooaUon
ORTH AMERICA
C!tlemsc.(Tembec) 165 185 185 75 75 75 75 75
ClPlnawhrbury 100 100 100 100 shutdown
RayanierPtAngeles 160 160 160 160 180 shutdown
Rayonier/Pt.AliCe(Westem) 170 170 170 170 170 shutdown 170
RayonierlHoqulam 80 80 60 80 80 shutdown
Rayoniarffernadi~ Be& 145 150 150 150 150 150 150 150
RsyonlarNerup 100 250 250 250 300 300 300
Canadian CelloloselSkeana 150 shutdown
Weyco~Everen 100 100 100 shutdown
WeycoICosrnopolis 140 140 140 140 140 140 140
Ketchikan PulplW 200 200 200
. ~
APClSilka 180 180 180
BuckeyeIFoIey 180 180 180 180 160 180
IPINetchez 350 350 350 a50 lutdown
tembeCrBiria(A1holvliIe) . 110 110
TembecIBirla(St.Anne) 260
BetlinghamlGP 40 40 40 40 shutdorm
Rayonierl~t.ca~er 250 shutdorm
Sub-Total 960 1885 2265 2525 1935 1305 955 1375
WESTERN EUROPEISCAN.
BonegaardlSwitz. 135 la5 New
BonegaardtNorway 160 180 160 160 180 180 100 180
SNlACElMly 65 65 03 65 65 65 65 85
RaumalFlnland 75 75 75 75 75 shutdm
MetsaIFin$nd 70 70 70 70 70 70 70 70
SerldchiuslFiniand 100 100 100 100 100 shutdorm
LenringlAusMa 134 134 134 134 134 184 134 134
FumlUiiaty 85 65 85 85 65 shutdown
WeatalisheJGerm 40 40 40 40 40 shutdown
~wabl$iie/~erm. 85 65 65 85 65 shutdown
DnnsioISweden 200 200 200 200 200 200 200 200
BillmdlSweden 100 100 100 100
~gersundlSweden 60 80 80 80
Udderhomslsweden 80 80 80 80
Waldoa(1Gemany 55 55 56 55
m~sayi~rance 70 110 110 110 o,.u.uunll
Sub-total 1319 1358 1359 1359 874 828 764 764
ASIA
JuWJpn. 140 140 ' 140 140 shutdown
Sanyo(GoM)IJpn 115 115 115 115 115 115 115 115
Sanw(hvak)Npn 55 55 56 65 55 55 55 55
KojinlJpn. 70 70 70 70 shutdown
Taiwan Pulflaiwan 65 86 85 65 65 shutdown
Grasimllndia 50 50 140 140 140 140 140 140
Slvllndia SO 50 50 50 50 56 50
Century Rayonlindia 30 so So 30 30 30
APRlindia 66 65 65 65 85 65
hdorayonlhdonetla 180 180 160 180 New
Sub.Tet.1 425 545 730 910 no a5 035 eaq
BEPORTED WORLD PRORUCTlW [FAO) 4767 4470 2893 3200 estimate j
( APPARENT EXCESS CAPACITY 1239 754 1041 109
Restart
New
~ew
AFRKA
Saiocor 35 90 360 400 600 800 800 Expansion
Sub-Total 35 90 360 400 M10 600 800
SOUTH AMERICA
Bwll 72 142 142 145 145 145 845 Upandon
Sub-Total 72 142 142 146 145 145 145
RUSSWEASTERN EUROPE 100 738 800 800 1WM 600 800 300 Contradfon
Sub-Total 100 738 600 900 1000 600 300 300
TOTAL WORLD CAPACIN 2804 4835 8388 5888 5224 3934 3988 4018

DWP vs Cellulosic Fiber Demand
Production
t Cellulosic
Years

FIGURE 1
CELLULOSIC STAPLE PRODUCTION: 1980 TO 2001
Fiber Organon
u -L

PROCESS

LDN, 711 112006
Cosmopolis Pulpmill Process
Background
The Cosmopolis pulpmill uses the acid sulphite cooking process. The mill's sulphite
cooking process is magnesium-based. Spent cooking liquor is evaporated and burned to
recover magnesium oxide and sulfur dioxide. Bleaching is accomplished in a 5-stage
bleach plant using chlorine dioxide (D), oxygen (O), sodium hydroxide (E) and hydrogen
peroxide (P). The mill's most often used bleaching sequence is D-0-E-D-P. The oxygen
and extraction stages are pressurized. After bleaching, the pulp is cleaned and then dried
on a fourdrinier pulp machine. The sheet may then be processed into bales or roles. The
mill has sizeable warehouse facilities for on-site pulp storage.
Built in 1957 to be a paper-grade sulphite mill, the Cosmopolis mill quickly evolved into
a producer of specialty grades. As mentioned in Terry Roarke's marketing section, the
mill's dominant product is now an acetate grade. Historically, the mill has produced
almost every sulphite specialty dissolving pulp product. Rail service to the plant was
eliminated several years ago. All materials and supplies arrive by truck and all product
leaves the mill by truck.
Recent Capital Upwades
Significant new capital investments, in recent years, include: 1) A bag house collector for
the power boiler hog fuel dryer exhaust, 2) a new electronic drive system for the pulp
machine and 3) new vacuum equipment for the pulp machine wet end.
Mill Maintenance Condition
Weyerhaeuser's intention to close the mill was announced in October, 2005. The mill
has operated continuously since that time to meet contractual customer commitments
(once again, see Terry Roarke's marketing section for details). Prior to the October
announcement, the mill was being properly maintained, actually being upgraded for on-
going operation. Since that time, certain maintenance activities have been eliminated or
deferred, always (if required) with the explicit agreement of the company's insurance
camers and the various applicable state agencies. Deferred activities include annual
inspections of all boilers and the biannual inspection of all pressure vessels. Both turbine
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LDN, 711 112006
generators are due for 5-year tear down inspections. Presumably, the mill is also behind
schedule on digester inspections and steam safety valve recalibration. Instruments,
quality control and quality assurance systems were previously maintained to IS09002
registration standards. This registration was allowed to lapse in April 2006. The painting
program to protect structural steel is also, of course, behind schedule now. Beyond these
exceptions, the mill is well maintained and fully operable.
Oualitv Assurance and Control
The mill operates an effective quality assurance and control system which, coupled with
relatively sophisticated and capable process equipment, results in the production of very
well regarded dissolving pulp products. As mentioned earlier, prior to April 2006, the
mill was registered to IS09002. The current off-quality rate is reportedly less than 2%,
all of which is reprocessed and sold as 'prime' pulp.
Bv-Products
The Cosmopolis mill has always operated a full red liquor recovery cycle and never
participated in any of the possible sulphite by-product markets- with one exception. In
the late 19603, the mill briefly produced acetic acid. The process to produce the product
worked but the product was unprofitable. This process has 'long been closed and the
equipment dismantled. However, given current ethanol pricing and demand, an ethanol
plant (associated with the mill). would appear to be an attractive potential investment.
(See the 'Alternatives' section of this report).
Currently, extraction stage filtrate is concentrated at the mill and sold to kraft mills
(apparently Port Townsend Paper Company- Port Townsend, Washington and
Weyerhaeuser's Springfield, Oregon mill) as a source of sodium and energy. Returns are
not good and neither mill apparently wishes to continue to take the waste liquor.
Continued sales of this material are obviously required if the mill is to: 1) continue to
focus primarily on the low yield, high purity acetate grades and 2) continue to meet its
environmental compliance obligations. Krishan Sudan of Paneltech has recently
produced an acceutable aualitv. lab-scale PF resin from this waste liauor and. if the mill
continues to operate and the mill owner is willing to enter into a commerciallv acceutable
agreement with Paneltech. further tests will be conducted on the new resin in commercial
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LDN, 711 112006
wood and vaver binding uses. Given current phenol prices, this could also be a very
attractive new opportunity for the mill.
Oreanization
The Cosmopolis pulpmill currently belongs to Weyerhaeuser's Pulp Business Unit
which manages sales and product logistics. Virtually all sales are direct (or 'inside') with
sales agents rarely employed. Most service functions (such as accounting, purchasing,
accounts payable, etc.) are managed at consolidated levels (are not part of the current
mill's organization). Scott Olmstead has estimated the requirements for moving these
functions back to the mill level and included them in his pro forma financial estimates.
As the former controller for Rayonier's Fernandina Beach, Florida dissolving sulphite
mill- the Cosmopolis mill's most direct U.S. competitor- he has an excellent
understanding of what would be required. Research and development, certain
environmental services and legal support have also been centrally managed in the past for
the Cosmopolis mill.
Prior to the closure announcement in October 2005, mill staffing included approximately
235 people. Of those, 195 were included in a labor bargaining unit (AWPPW Local 21 1).
The currently applicable labor contract is of the union shop variety. Forty salaried
workers have also been engaged in 'non-bargaining unit work', including supervision,
professional occupations, logistics and scheduling activities. With no clearly identified
prospect for continued employment at the mill, many of this group have either been
reassigned within Weyerhaeuser, have left for other jobs in the industry or have indicated
that they will retire at the time of mill closure. Some bargaining unit employees,
generally those with fewer years of service, have also chosen to pursue other jobs despite
the company's apparent offer of a mill severance package for those who choose to stay
on until the mill is closed. Perhaps 10 hourly employees have left as the time of this
writing.
Like most pulp and paper mills in the U.S., the Cosmopolis mill has substantially
automated and reduced its work force over the past 25 years from a high of about 380. It
is important to note that, at that time of higher staffing, the mill also ran a log sorting yard
and chip plant. Those activities were subsequently contracted out.
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LDN, 711 112006
Labor Relations
Historically, the relations between Weyerhaeuser and the AWPPW, in general, and Local
211 in particular, could be described as mixed. Strikes, involving all Weyerhaeuser
AWPPW mills, occurred in 1971,1978,1983 and 2002. All of these strikes occurred at
times of contract renegotiation. All ratified and signed labor agreements for the mill have
called for no strikes during the contract term (binding arbitration to settle disputes) but,
on a few rare occasions, workers have briefly refused to cross a picket line established by
another union. Arbitrations generally have arisen from disputes over work rule
implementation or from the use of contractors for maintenance and capital improvement
work. These disputes have obviously been time-consuming for managers and disruptive
to mill operations. The AWPPW historically sought to restrict maintenance to craft lines
and that, at times (according to Truman Seely), also led to less than desired mill
efficiencies. With the negotiation of 'multi-craft' and with the increased recognition by
the union of the need for greater mill competitiveness, these problems were (once again,
according to Truman) greatly diminished.
The above said, Truman believes that Local 211 has in many ways been a willing partner
in the mill's previous successes. They have always recognized the importance of
customer service, product quality and operational effectiveness. They have not resisted
technological developments that have led to work force reductions nor have they felt
compelled to zealously defend the jobs of people who have behaved irresponsibly. They
have willingly united with mill management in the past on issues important to the millfrom
customer relations to environmental regulation.
Apparent Process/Product Opportunities
o 'New' Grade Production opportunities:
Relatively high or intermediate viscosity, high R-10 grades would be
seem to be insulated from haft grades in the market, to some degree.
1. Ethers
2. MCC
3. Nitration()
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LDN. 711 112006
Short term:
1. molding compound
2. fluff rolls in Asia, unsoftened or softened
3. ultra high cleanliness papers
4. Grays Harbor Paper
o Process change opportunities
Mill seems to be sub-optimized for energy (oil and purchased
electricity verses hog fuel, MEE's vs. VCE)
Chemical usage may be higher that necessary
- <strong>Report</strong>ed yield seems slightly low
Possible fiber furnish changes to balance availability
* Ethanol production would probably be attractive (see the
'Alternatives' section and the discussion of ethanol opportunities)
There appears to be a better opportunity for the sale of alkaline
extraction liquor (PF resin)
Equipment/Process Detail and Apparent ProcesslProduct Opportunities
Chip Supply
o 3 chip dumps, truck only delivery
o Close, long term contractual relationship with an off site chipper (Local
Manufacturing)
o Recent chip suppliers
Weyerhaeuser Aberdeen Sawmill
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LDN, 711 112006
Sierra Pacific
Dahlstrom Sawmill
Allen Log
Oakville Forest Products
Local Manufacturing (custom chipping)
Weyerhaeuser Raymond Sawmill
o Emphasis on fresh chips and small chip inventories
o Pretty much a 2 species operation now, primarily hemlock and some Douglas
fir
o Historically could do 4 sorts
o Chip screens and re-chipper on top of silos
o chip silos (5-7 cooks1 silo)
o Chip drag re-claimers for outside storage
Cooking
o 9 batch digesters, - 9000 ft 3
o Current minimum cook spacing is 55 minutes or 26 cookslday
o 495 minute cycle time or 8.25 hours
o Rough time distribution
Fill
Steam
Time at temp
Blow down
Dump & check
50 minutes
185 minutes
200 minutes
45 minutes
15 minutes
o Minimum design spacing is 52.5 minutes or 27 cookslday
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LDN, 711 112006
o Filling is steam assisted
o Fast temperature rise increases rejects
o 40% Douglas fir leads to heavy (barely tolerable) rejects (cooked up to 70% in
the past, sometimes with terrible results, but 50% was generally tolerable)
o Other species historically cooked:
Alder with some cottonwood) up to 75%
Cedar (up to 50% with 50% Alder)
Washing and Screening
o Digesters are pumped out after cooking. Red liquor is used to dilute in
pump out cycle. (1 per dump tank)
o Pulp is stored in a dump tank (with agitation), transferred to constant
head tank then delivered at a controlled rate to the brown stock
washers.
o After #3 washer the pulp goes into a soak tank (agitated, with
approximately 30 minute retention).
o Then over vibratory knotters and on to #4 washers.
o From #4 washer the pulp is delivered to one of two brown stock medium
consistency storage tanks.
o Pulp is transferred to the screens via a low density blending tank then
through a dilution header.
o After screening the pulp passes directly over a washing decker and is re-
diluted and pumped to screened low density storage.
o Water is used for washing on the brown decker and flows countercurrent
forward. (5 washing stages)
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LDN, 711 112006
o Digesters: Welded carbon steel shell, cement or fiberglass membrane
overlaid by 2 courses of brick. Outer course is carbon.
Inside volume-9000cts.
Indirect heating
o Dump tanks: Brick lined carbon steel agitated with pedestal mount
central agitator
o Washers: 11.5 ' x 16' Impco vacuum drum washers (cone end valve
type), drums rebuilt to anti-rewet design in 90's
o Decker: Impco 20'x12'() vacuum type, flat face valve
o Knotters: Vibratory
o Screens: Primarylsecondaryltertiary cowans with KX style rotors
Secondary and tertiary accepts feed radiclone cleaners (5 effective
stages). Primary cleaner accepts join primary screen accepts.
Bleaching
o The bleaching system consists of five stages, two of which are
combined without washing.:
o The nominal first stage is an upflow low consistency tower (3%), with
a central agitator, delivering pulp to #1 bleached washer 11.50 x16.
Originally a chlorination stage, it is now normally used as a chlorine
dioxide stage
o Following the first stage stock is heated and pumped into an upflow
tower which functions as a pressurized oxygen stage. Following
oxygen the pulp goes through a blow tank and degassing mc pumps to
a downflow pressurized caustic extraction stage. From there it is
pumped to two stages of vacuum drum washing. The first of these is
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LDN, 711 112006
an 12'x18' Kamyr washer of end valve type, the second an 1 l.S'x16'
Impco. Washing on these stages is countercurrent with filtrate to
evaporation.
o The next stage is usually an upflowldownflow mc tower normally used
for chlorine dioxide bleaching. Alternately the sequence may be
exchanged with the next stage. After washing the 11.5'x16' Impco,
the pulp goes to the next and final stage.
o The final bleach stage is mc batch cells with central screw agitators.
Usually it is a peroxide stage. The stage washer is again 1 l.S'x16'
Impco. After this stage, the normal route for stock is to one of two
bleached medium consistency tanks.
o From the MC tanks, the pulp is transferred to a low density tank in the
machine system.
Machine
Pulp flows from the low density chest to screening and cleaning. From the
chest, pulp flows to the headbox system via a stuff box, then on to
dewatering and drying by more or less conventional means. The sheet
from the dryers goes either to the machine cutter layboy (or now, more
commonly) to the reel system where it is made into jumbo rolls. Jumbo
rolls are transferred to the winder and converted to rolls which are
weighed, labeled and sent to the warehouse for shipment.
o Screens- Cowan rotary atmospheric, 3 stages
o Cleaning- Centricleaners. Stages 1-3 Bauer 3 !h", Stages 4,s- Bauer
6"
o Headbox- Beloit Converflow
Q
Fourdrinier- Cantilever roll out type, table rolls, foils, wet and dry
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LDN, 711 112006
boxes, lump breaker, manual pickup
o Dryers: Minton (52 drums) Flakt
o Sheet cooler
o Densifying press
o Winder: Cameron, rebuilt several times. Purchased used in the '60s
o Machine width 162' () trim - 148"
Miscellaneous
o Fiber recovery system
o Acid storage and accumulators
o Red liquor storage
o Hot water heat exchange and storage
o Chlorine dioxide generation (Solvay process)
o Water treatment
o Primary spill collection
o Secondary treatment
o Surge lagoons
o Spoils area
Knots and Tailings
o Knots are collected and trapped to remove metal and rock, then refined
o Refined tailings are washed and dewatered then pumped to the
powerhouse, drained and pressed and added to hog fuel.
o Filtrate system is closed to #3 filtrate tank.
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LDN, 711 112006
Power and Recovery
o Evaporators: red liquor, motor-driven vapor recompression unit plus
6-effect unit by CBI
o Extract filtrate: turbine-driven vapor recompression unit, plus 4-effect
CE unit
o Powerhouse principal equipment
o Boilers all 930 psig, 825 F
Red liquor boilers
Power boiler (hog fuel and oil): divided firebox, stationary
grate design 180,000 lblhr
o All boilers are extended air heater design and lack economizers
o Feedwater heating is by external heat exchangers
o Turbine generators
2- 7.5 MW: #I- ex 50 psig, eh 2"hg, #2 ex 150, eh 50
o Hog fuel dryer with fluid bed burner, rotary type
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FIBER

LDN, 711 112006
Fiber Procurement Opportunities for the
Cosmopolis Pulp Mill
Background
The Cosmopolis pulpmill is located in the middle of the range of the western hemlock
('hemlock') tree, a range which extends along the Pacific Coast fkom the Califomia-
Oregon Border up through Southeast Alaska. Growing in these predominantly hemlock
timber stands are smaller quantities of sitka spruce ('spruce') trees and an even smaller
volume of 'true' fir trees. For many, many decades, hemlock, but also some spruce and a
smaller volume of alder, Douglas fir and 'true' fir, have been utilized by this area's
sulphite pulpmills to produce viscose, acetate and ethers dissolving pulp grades.
Over time the older dissolving sulphite mills have closed (e.g. Rayonier- Hoquiam, Wa,
Rayonier- Port Angeles, Wa, Alaska Pulp- Sitka, Ak, Ketchikan Pulp- Ketchikan, Ak)
and today only two mills remain in operation- the Cosmopolis mill which Weyerhaeuser
has announced that they intend to close this year and the Port Alice, BC ('Neucel') mill
which has recently been restarted after years of intermittent operations.
So why has the Cosmopolis mill a small and unique old mill in Weyerhaeuser's massive
portfolio of assets, survived while other hemlock fiber-based sulphite mills (and even a
much larger, presumably much more efficient International Paper PHK mill in Natchez,
Mississippi) have failed In the marketing section of this report, Teny Roarke attributes
the mill's survival to its focus on the production of high quality acetate grades. That is
undoubtedly true but there are other reasons. Hemlock fiber supplies in Western
Washington have actually increased in recent years as sawmillers have expanded capacity
to serve the hot U.S. housing market (generating more, lower cost sawmill residual chips)
and as the global competition for Western Washington hemlock logs has declined. On
the other hand, hardwood fiber costs in the U.S. South, due to heightened OSB pulplog
competition, more stringent harvesting restrictions and other factors, have escalated
rapidly. While prices have more recently leveled off, between 1988 and 1998, hardwood
pulpwood prices across the U.S. South escalated by roughly 12% per year!
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LDN, 711 112006
Our company has completed Western Washington timber-supply consulting assignments
for clients in the past and, while the detailed results of those studies are proprietary, the
general statistics are well known. The harvest of Western Washington whitewood
(mainly hemlock but some spruce and true firs) was well over 1.5 billion board feet in
1990 and it dropped to about 1.2 billion feet in the mid-1990's. It has since stabilized
and, while Douglas fir has generally been replanted on harvested areas, it will likely
remain at roughly that same level for the foreseeable future. Log exports, especially
exports of hemlock and spruce logs, have dropped very sharply from Western
Washington in recent years. In 2000, 138 MMBF of logs (mainly Douglas fir but also
sizeable volumes of whitewoods) were exported from Grays Harbor to Asia. In 2005,
only 65 MMBF of logs were exported fkom Grays Harbor to Asia (almost exclusively by
Weyerhaeuser) and almost all of this volume was Douglas fir. Roughly 10% of the
volume harvested only has value as pulpwood and, of the logs that are converted to
lumber in a typical sawmill, about 40% of the cubic volume must be produced as chips.
Hemlock pulplogs have been purchased by two independent whole log chipping
contractors in the Grays Harbor Area for many years. The chips produced by these
contractors have been loaded aboard barges (each independent contractor also owned and
operated their own chip barge loading operation) or loaded aboard and transported by
truck, generally to pulpmills along the Columbia River. Weyerhaeuser has occasionally
chosen to buy some of these chips but most of them have been sold to others.
Weyerhaeuser now apparently believes that it can achieve significant fiber cost savings
by curtailing Cosmopolis pulpmill operations and by routing local, company-controlled
hemlock fiber to its Longview operation. This action would logically increase hemlock
fiber supplies in the Columbia River area but, unless Weyerhaeuser ignores market prices
(or the action has a significant price discrimination effect), it wouldn't seem to
substantially change fiber costs in that area- any fiber cost reductions would also
logically be shared with fiber competitors.
Public, vertically-integrated, U.S. forest products companies like Weyerhaeuser have
disposed of most of their timberlands in recent years. About 30 million acres has
changed hands since 1996. New Timberlands Management Organizations (or 'TIMO's')
are the most common buyers. Rather than selling, some public companies (like
Rayonier) have chosen instead to convert themselves into Real Estate Investment Trusts
(or 'REIT'S'). But, in order to become a REIT, a company must primarily be in the
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LDN, 711 112006
I
timber and land business. The tax rewards for REIT-qualifying companies are
handsome- it has been reported that for every dollar of profit that Weyerhaeuser makes
cutting down and converting their own trees, the company's investors earn only $.51.
For every dollar of profit that Rayonier (which, of course, also makes dissolving pulp and
sells logs h m the timberlands it still owns on the Olympic Peninsula) makes cutting
down and selling similar trees, Rayonier's investors earn S.85. It would seem equitable
(and inevitable) that Weyerhaeuser (and the few other remaining vertically-integrated
public forest products companies) would eventually gain tax parity but another, more
serious trend also seems to be at work here. Driven to enhance shareholder value, public
forest products companies aren't just selling timberlands. They are becoming less
integrated and more market responsive at every stage of their value chains. The
importance of this trend to a new Cosmopolis mill owner is obvious- open markets will
very likely guide the future allocation of Weyerhaeuser timber and chips.
The Grays Harbor area has had such a surplus of whitewood logs that our company began
transporting hemlock and spruce logs fiom the area, via railcars, to Southern Oregon,
Idaho and California sawmills and veneer mills in the late 1990's. We still do so today
but the volume has dropped considerably due to the construction of new, nearby sawmills
and (most recently) to much higher rail rates and declining wood products prices.
Pacific Northwest Hemlock Fiber Procurement Basics
A mill's success in fiber procurement in the Pacific Northwest is a hction of the mill's
fiber procurement strategy and its execution. The exhibit on the following page gives an
overview of the factors that constrain such a strategy. Along the bottom of the page is the
geographic distribution of fiber that meets the mill's fiber quaIity requirements. As can
be seen, the distribution of this fiber (illustrated by the 'trees') is not uniform Some
areas contain more fiber, other areas contain less. Companies attempt to locate mills in
areas where the required fiber is relatively abundant but, over time, this situation tends to
change. Uncompetitive mills may go out of business or an insect infestation may occur
(like the current mountain pine beetle epidemic currently underway in the interior of BC)
thereby creating areas with relatively more or less abundant fiber supplies.
Cosmopolis Pulpmill Project- Fiber
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LDN, 711 112006
High logging costs (as in BC), high transportation costs and the closure of uncompetitive
sawmills may also dimiish the supply of economically accessible fiber.
A mill's ability to compete for this distribution of economic fiber is a function of the
mill's non-fiber economic value-added (in a nutshell, a more profitable mill can afford to
pay more for wood than a less profitable mill can). This is illustrated by the 'height' of
the mill in the yellow shaded area; Mill B is higher in the yellow box because it has
greater non-fiber value-added. Another key determinant of a mill's ability to compete for
fiber is the transportation options available to the mill. These options are illustrated by
the colored lines emanating from the 'mills' to the 'trees'. The black lines are rather
steep to illustrate higher variable cost trucking. The blue lines are less steep, illustrating
lower variable cost railing costs. And the red lines have even less slope, illustrating the
lowest variable cost transportation mode, barging. Current variable transportation costs
are shown in the following table.
Transportation Mode
Truck
'Class 1' Rail
'Shortline' Rail
Barging (4,000 BDT Barge)
Barging (8,000 BDT Barge)
Variable Costs
$.215/BDT/One Way Mile Haul
$.125/BDT/One Way Mile Haul
$.105/BDT/One Way Mile Haul
$.075/BDT/One Way Haul Mile
$.065/BDT/One Way Haul Mile
Five things are worth noting about the figures from this table: 1) Trucking costs are
substantially higher than rail or barging costs. With higher and higher &el prices, this
variable cost spread has recently grown quite large. In fact, many mills are arguably
overly-dependent upon trucking now, the most flexible form of transportation. This is
because &el price increases were very modest for many years and trucking rates tended
to decline after surface transportation (truck and rail) rates were deregulated around 1980.
2) These trucking costs are the costs for Washington state truckers. In BC, for instance,
where truckers are permitted to haul much larger payloads, variable trucking costs are
lower. 3) While barging and railing are less costly, neither barges nor railcars can
obviously go everywhere. Note in our example that 'Mill A' doesn't even have access to
barge. This is not uncommon. The Cosmopolis mill currently lacks direct access to
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LDN, 711 112006
either rail or barges. Furthermore, the fixed costs associated with staging, loading,
unloading and, in many cases, re-hauling and truck delivering fiber that is transported by
rail or barge are often quite substantial. 4) Class 1 rail rates, rates for the two large
western railroads- the Union Pacific and the BNSF- are rates for relatively long hauls
and, in some cases, the railroads will price even higher than these estimates to discourage
incremental business. Both railroads are very busy with rapidly growing intermodal
(incoming containers, predominantly fiom China) and coal demand and, since there are
only two class 1 railroads and (as we previously discussed) competitive trucking rates are
up substantially because of higher fuel costs, both class 1's are exercising their
considerable pricing power and are driving up western rail rates sharply. 5) Variable
barging costs, especially for the largest barges, are very modest. This means that it costs
very little more, variably, to barge &om the north coast of BC to Longview, Wa or even
Arcata, Ca than it does to barge to the 'nearby' Port Alice BC mill. For example, it costs
about $20/BDT to barge pulpwood to Port Alice and only about $30/BDT to barge all the
way down and up the Columbia River to Longview.
As complicated as this simple exhibit is, it still over-simplifies the actual fiber
procurement competitive environment. Mills don't totally dominate fiber procurement
areas, as shown, because of fiber procurement 'price discrimination' strategies. What
does this mean In the economist's 'perfectly competitive' world, the 'rule of one price'
prevails. Every fiber supplier, in this somewhat hypothetical world, knows what every
other fiber supplier is being paid- on a delivered-to-the-mil1 basis- and demands and
receives the same price. In actuality, mills often buy wood at a great distance at a greater
cost because the same mill's local suppliers, who have a much better idea of what each
other are being paid, have no way of knowing what the delivered cost of this fiber is.
And the marginal cost of this fiber- the additional cost of this fiber over that paid to local
fiber suppliers- is often les than the marginal cost of additional, locally-sourced fiber
when the marginal cost of the spread of this information to local fiber suppliers is
factored in
A vertically-integrated company like Weyerhaeuser, a company that makes most resource
allocation decisions with command-and-control mechanisms (versus the market-based
mechanisms illustrated in the previous discussion), typically has numerous opportunities
to improve its fiber procurement strategy, execution and fiber costslquality. The tables
below lists some of these apparent new opportunities:
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LDN, 711 112006
Transportation Models
Truck
Truck
Truck
Barge & Trade
Apparent Hemlock Fiber
Opportunity
SPI has built a new, local
sawmill and intends to build
another, buys timber sales,
'partner' with SPI re:
residual chips and
pulpwood
(250,000 BDT
opportunity)
'Short stop' hemlock fiber
fiom north of Hoquiam on
the Olympic Peninsula
(175,000 BDT's hemlock
pulpwood, 150,000 BDT's
residual hemlock chips)
Weyerhaeuser's Aberdeen
small log sawmill seems
unlikely to survive on DF
($8OIGT C-N-S) versus
Hemlock C-N-S ($401GT),
'partner' with successor,
150,000 BDT opportunity
Compete for plentiful, high
grade 'Pulpwood" fiom the
north coast of BC, deliver
to Longview (Rainier), sort
and chip, trade Weyco for
Cosmopolis area fiber (200,
000 BDT opportunity/)
Keys to Execution
Convince SPI of the merits
of such an agreement, pay a
'fair' price, 'partner'
'Tough out' Weyco's future
efforts to try to dominate,
price discriminate, superior
fiber buyer skills, tighten
focus on whole tree
chipping
Kilns at pulpmill utilizing
surplus steam, helping
shape the succession in
local sawmill ownership
1) Grade log market (RFP)
2) Barging, Teevins,
chipping and short haul rail
Agreements
3) Weyco Longview chip
trade agreement
Cosmopolis Pulpmill Project- Fiber
Page No.7

LDN, 711 112006
Transportation Models
Barge & Trade
Short Haul Rail
Shoa Haul Rail
Short Haul Rail
Short Haul Rail, Truck
Apparent Hemlock Fiber
Opportunity
Compete for very plentiful
Interior BC SPF residual
chips (maybe even buy
fiom Weyco), barge to
Longview (Rainier), trade
for Cosmopolis area fiber
(400,000 BDT
opportunity)
'Partner' with new
Centralia Sawmills mill
once it has kilns,load
hemlock C-N-S in
Aberdeen, rail to Centralia,
trade for hemlock chips
back (150,000 BDT
opportunity)
Buy and load hemlock
pulpwood aboard railcars at
Belfair, Wa (30,000 BDT
opportunity)
Trade Weyerhaeuser chips
purchased fiom suppliers on
the CORP at Longview for
Cosmopolis area fiber
(400,000 BDT
opportunity)
Trade Simpson DF chips
FOB Tacoma (via PS&P
and Tacoma Rail) for Mil 5
hemlock truck chips
(1 00,000 BDT
opportunity)
Keys to Execution
1) Mission, BC
'Westerny chip barge
loading facility
2) Barging, Teevins,
chipping and truck haul
agreements
3) Weyco Longview
chip trade agreement
1) Centralia Sawmills
survives lumber market
shakeout, kilns
2) Current chip supply
agreement expires
3) Reasonable rail rates,
service
1) Rail loading operation
2) Reasonable rail rates
1) Chip unloading,
transferring at
Rainier (Teevins)
2) Chip hopper supply
3) Chip purchase
agreements
1) 'Local' agreement
2) Simpson agreement
3) Rail agreements
Cosmopolis Pulpmill Project- Fiber
Page No.8

LDN, 711 112006
Transportation Modds
Barge and Truck
Truck
Barge
Apparent Hemlock Fiber
Opportunity
Mill Site Chip Plant and
Barge Unloading With
barge fiber,
($1,OOO,OOO/year+ cost
opportunity)
Alternative species for
viscose grades- alder and
DF less costly in local,
truck proximate area
Load Hemlock (Interfor)
Chip Barges at K-Ply (Port
Angeles) and Barge to Mill
Site (100,000 BDT
Opportunity)
Keys to Execution
1) Versus Local
2) Permits Time
1) Mill capability
2) Suitable viscose
grades
1) Mil site barge
handling
2) K-Ply and Interfor
agreements
While it is impossible to hlly predict what the costs of fiber to Cosmopolis would be
with full or partial success with each of these strategic sourcing options, the review team
is confident that a fiber mix of 100% hemlock for acetate grades and 20% alder and 80%
hemlock for viscose grades could be procured in the future for $86/BDT- hemlock and
$76/BDT-alder. (See 'Financials' section)
The new hemlock fiber opportunities listed in these tables are far fiom exhaustive and
they are offered only to give a sampling of what a new mill buyer might conceivably do
to 'wood' the Cosmopolis mill. Further information on these and other opportunities is
available fiom the Paneltech review team (see Roy Nott). Furthermore, a flowchart at the
end of this section more completely details the mill's fiber cost drivers.
The key conclusions to this point in our discussion of fiber procurement are: 1) The
Cosmopolis mill is largely dependent upon a specific type of fiber (hemlock) which it is
well-located to economically access by three transportation modes- truck, short haul rail
and barge. 2) Weyerhaeuser's chosen form of organization- primarily vertical integrationhas
likely lessened its involvement in and sensitivity to many potential open market
hemlock fiber procurement opportunities. 3) There appear to be several viable economic
Cosmopolis Pulpmill Project- Fiber
Page N0.9

LDN, 711 112006
opportunities to more economically replace the fiber Weyerhaeuser says its intends to
route fom the Cosmopolis mill area to Longview in the future. Unfortunately, these
opportunities to trade fiber with Weyerhaeuser in the future may also be hampered by the
company's current form of organization and decision making.
Cosmopolis Pulpmill Project- Fiber
Page No. 1 0

Cosmopolis Hemlock Chip Cost Drivers

COMPETITIVENESS

LDN, 711 112006
Competitive Analysis
Acetate (see Graoh 1)
The most recent Weyerhaeuser competitive analysis is apparently fiom 1999. The
conclusions fiom that analysis might be considered suspect because:
1. The second lowest cost acetate producer, according to the study, was International
Paper Company's Natchez, Mississippi PHK mill and it subsequently closed.
2. The Port Alice mill, a mill with an indicated lower production cost than
Cosmopolis, closed twice since then for lack of profitability and has only recently
restarted with new owners, new government assistance and reportedly with
significant workforce compensation reductions.
3. The Cosmopolis mill gained significant marketshare in acetate through the period
1999 to 2005.
Possible explanations for these apparent anomalies:
1. The Cosmopolis mill invested heavily in automation during this time period and
focused more intently on grade mix simplification. Total mill staffing was
reduced kom about 310 to about 235 people, with what is likely a $30-40lADMT
reduction in costs.
2. European currencies strengthened against the dollar adding, according to
Weyerhaeuser, about $70lADMT to a European producer's cash costs to produce
(paper-grade kr&) pulp relative to US producers.
3. Eastern Canadian producers have also been handicapped by their strengthening
currency- to the tune of about $50/ADMT. Also, serious wood issues have
surfaced in this area.
Cosmopolis Pulpmill Project- Competitive Analysis
Page No. 1

Graph 1
Acetate Cash Production Cost Estimates
1999.1
1,000 2, 3,000 4,000
Cumulative ADMTfDay
Graph 2
Molding Cash Production Cost Estimates
1999.3
200 400 600 800
Cumulative ADMT/Day

LDN, 711 112006
4. Obviously, Western Canadian producers have also been impacted by the
strengthening 'loony' (Canadian Dollar).
2. Southern U.S. pulp producers must increasingly compete with new, more
productive and (recently) far more profitable OSB producers for their softwood
and hardwood fiber supplies. More stringent harvesting restrictions and increased
demand have especially (as mentioned in the executive summary) impacted
hardwood fiber costs.
6. Saiccor does not appear to have gained much of a position in acetate, possibly
because of significant quality and processing issues.
Ethers and Moldine Com~ounds (see Graah 2)
With the exception of Saiccor, this 1999 chart is pretty flat. One would think that the
weakening of the U.S. currency, the shutdown of the competitive GP-Bellingham, Wa
mill and the improvements in the Cosmopolis mill's relative cost position would offer
attractive opportunities in these markets for the mill. It may simply be a globally oversupplied
market. Saiccor does not seem to have the high brightness capabilities nor the
interest in the top end of the molding compound market.
Methodolow for Comaetitive Anahrsis
I. Weyerhaeuser Data Base
I
I
I
I
Start with published literature for total tons per day.
Run a backward fiber balance to the wood source.
Consider the type of process and number of lines.
Quarterly update of regional fiber costs.
Add mill specific species/chiplround wood knowledge.
Use an energy balance based on mill type and age.
Consider hog boiler contribution fiom wood supply.
Make up with fossil fuel and regional fuel costs.
Consider turbine generator capability.
Chemical use depends on mill type and bleach sequence.
Model is not refined for P11K so bleaching costs were increased.
No byproduct credit for 1000/c hardwood.
Labor, salary, and material costs driven fiom people counts.
Cosmopolis Pulpmill Project- Competitive Analysis
Page N0.3

LDN, 711 1/2006
11. Refine the above
Trip reports, current literature
Pulp and Paper on line
Dow Jones news search
.
New capital survey
New capacity survey
111. Assumptions for a PHK mill
Southern mill on 100% hardwood
Acetate production
.
Batch digesters
Cold caustic extraction
Uodated Truman Seek Grade Cost Cornoarisons CMav 7.2006)
After our project team's meeting on the May 5,2006, Truman volunteered to provide his
best shot at the current manufacturing cost for viscose staple pulp at Cosmopolis. This
arose fiom the apparent need to fill the mill schedule, and the assumption that viscose
staple might be the best, short- term way to do it. In order to keep things consistent,
Truman tried to stay with the same basic assumptions used to create the acetate grade
cost. Once he got started, it occurred to him that a little more information on the same
basis might be worthwhile, so he also worked up a cost for the molding compound
product and for fluff or tissue grade. In all cases he assumed a flat wood cost, $80/BDT.
We need to keep in mind however that the viscose grade could be designed to include as
much as 30% hardwood and the molding compound grade can use Douglas fir blended
with hemlock up to the mill tolerance limit (say 50%) and on a flexible basis. Fluff could
also be designed to be high in Douglas fir if desired, but hardwood is a no. Hardwood and
Douglas fiber is generally less costly than hemlock fiber. A tissue grade would likely be
straight hemlock. Historically, viscose was 30% alder, 70% hemlock, molding
compound was 50% hemlock and 50% Douglas fir and WEYCELL was 60% hemlock
and 40% Douglas fir.
Cosmopolis Pulpmill Project- Competitive Analysis
Page No.4

LDN, 711 112006
Wood
Maint.
Chemicals
Energy
Op. Labor
Salaries
Op. S&E
Total
Grade Cost in W M T
Acetate Viscose Molding Fluff or Tissue
$228 $216 $200 $200
$157 $154 $138 $138
$121 $93 $62 $45
$64 $63 $56 $56
$86 $84 $75 $75
$35 $3 5 $3 1 $3 1
$2 1 $2 1 $19 $19
$712 $666 $581 $564
With the exception of chemicals, these different cost estimates are a simple consequence
of dierent yields and run rates. The yields used were: 1) for acetate, 0.35 ADMTIBDT,
2) for viscose, 0.37, 3) for molding and 4) for fluff, 0.40. Run rates were 400 ADMTID,
410, and 450, respectively. Based upon his past experience, Truman believes that the
mill's recent $4 million in annual mill capital spending and $20 million in annual
maintenance spending seems excessive.
Port Alice
As mentioned previously, the mill that could represent the most direct threat to
Cosmopolis is the Port Alice mill the 'Neucel' mill located at the north end of
Vancouver Island in British Columbia. Richard Bassett, Neucel's CEO has publicly
committed to spend 'more than C$100 million to establish the mill as a world player in
the niche market of dissolving sulphite pulp'. (Nanaimo Daily News, May 6,2006) This
will be an ambitious undertaking because the mill has struggled in the past, under
different ownership, to utilize its existing capacity (see the Port Alice Pulp sales graphs
that follow this page) and Neucel reportedly intends to both expand capacity and to move
more of its product mix into higher purity, acetate grades.
Hoe Fuel
The Cosmopolis mill does not just compete in the dissolving pulp market, it also
competes in the fiber (see the wood fiber section) market and the hog fuel market- the
market for wood waste to fie its power boilers. The mill's principle competitor for wood
waste (or hog fuel) is Grays Harbor Paper Company. Grays Harbor Paper has recently
committed to the installation of an additional 7.5 MW turbine generator. This will
Cosmopolis Pulpmill Project- Competitive Analysis
Page N0.5

LDN, 711 112006
tighten the local hog fuel supplyldemand balance and make the market more competitive.
The competitive hog fuel supply curve follows the Port Alice pulp sales graphs in this
section of the report).
Substitutabilitv of Pulas
Another reason for the Cosmopolis mill's economic 'staying power' is substitutability.
Hardwood acetate pulps produced by the larger scale PHK (or, in the case of Saiccor, the
sulphite) processes have not proven to be perfect substitutes for hemlock pulps produced
by the sulphite process. And efforts to convert existing sulphite mills to the production of
quality acetate pulps have often proven to be time-consuming and problematic. For
example, despite their repeated attempts (with the assistance of the former director of
Rayonier's acetate technology and the former technical director of Saiccor), Alaska Pulp
Company's Sitka, Alaskasulphite dissolving mill ultimately was unable to make and sell
a significant volume of acetate pulps and the mill was eventually forced to shut down.
The Port Alice mill is once again making the attempt (perhaps encouraged by
Weyerhaeuser's announced intention to shut down the Cosmopolis mill) but, as the
graphs near the end of this section illustrate, the Port Alice mill has also struggled with
this challenge in the past. Furthermore, the Port Alice mill is dependent upon barged
pulplogs (doesn't take wood chips), barging costs are relatively insensitive to distance
(increasing barge wood competition), logging costs are as much as twice as costly in B.C.
as they are in Western Washington (most pulplogs are currently left 'in the bush' in B.C.)
and some wood species in Northern B.C. have known acetate pulp quality problems.
Pula Transaortation Costs
Domestic, ground transportation costs in the United States have climbed sharply in recent
years as fuel prices have escalated rapidly and as the few remaining, large 'class 1'
railroads have exercised their growing pricing power. Container rates to Asia have
remained reasonable, however, and, with the planned expansion in the number of larger,
higher capacity, 'post-Panamax' (too big for the Panama Canal) container ships, some
shipping industry pundits have even suggested that the container ocean rates, west-bound,
could decline in the next few years. The Cosmopolis mill suffers for the lack of direct
rail access but it does have nearby access to both class 1 railroads and shortline railroads
and it has good access to the fastest growing Asian dissolving pulp markets.
Cosmopolis Pulpmill Project- Competitive Analysis
Page No.6

Competitive Mills'(1999 Review)
Group 1 AcetaWiohring
Mill
Weyerhaeuser
Westem
Rayonier
Borregaard
Saicmr
IP
Rayonier
Buckeye Tech
Buckeye Tech
Location
Cosmopolis
Port Alice
Femandina
Sarpsborg
Umkommas
Natdlez MS
Jesup GA
Foley FL
Memphis TN
- Barker
1997 Properties
1999 Tons and Pmple Dissolving Reference
ChiDYld Total TID Grade T/D Mill People People Grade
0.92 0.350 385 385 311 311 MAC 942 0.36
0.92 0.350 420 420 475 475 Anstaple 94.1 0.36
0.92 0.350 430 430 349 349 Rayomrd W 94.9 0.36
0.92 0.350 456 228 500 251 Future Grade 0.36
0.92 0.350 1,520 1,520 1,270 1,270 V (Viscose) 90.2 0.36
0.86 0.318 ,150 1,150
779 Viswcell (Vis) 92.9 0.33
0.87 0.331 #,600 800 779 884 884 Sulfatate-HJ 97.7 0.33
0.87 0.331 1,279 429 850 340 BuckeyeA-5 96.5 0.33
0.750 285 285 206 206 Linter -96 0.75
Assumed
Acetate Tot Mill Grade
R-10 Yield ADMTRay ADMTID
Assumption: Mills produce as much MAC acetate type pulp as they can (Whole mill or just dissolving line)
Group 2 MouldinglPhoWEthers (NOT UPDATED IN 1999)
Weyerhaeuser Cosmopolis 0.87 0.97 0.38 0.92 0.3496 399 133 337
GP
Bellingham
Borregaard Sarpsborg 0.87 0.97 0.42 0.95 0.399 456 228 500
Tembec Temiscaming 0.87 0.97 0.42 0.95 0.399 1,180 230 910
Saicmr Umkomaas 1.600 1,600 1.270
MoDo
Ornskoldvik
PH
Puget Ultra
MC
TeniMe

Mill Location- Feber
Product Location- World Total Mill Line Chemical Electrical Total Fuel Total
Company Name Mill Name Subset Slate Region Production Output Fiber Cost Cost Cost Labor Material Salary Other Total Cost

Port Alice Pulp Export Sales
1996
Source: BC Stab, Statist
CanadaRI.S. Exchange I
Prices "FOB Point of Export
Germany
s Canada
ate- .733
rom Canada"
PortAlice
Mill C apdi
180 MADMT
France
Poland \
Australia
(499)\
Austria
(223)\
I ,
25 50 75 100 125 150
MADMT

Port Alice Pulp Export Sales
1997
Source: BC Stab, Statistics Canada
CanadaN.S. Exchange Rate- .722
Prices "FOB Point of Export From Canada"
Port Alice
Mill Capacky
160 MADMT
The Company agreed
to purchase d n
d'e-tws, spare
psrts and wrkus
otherassebofthe
' Ketchiksn Pulp
Compsny (RH
install- at Port
Allce) during this
war
25 75 I00 125 150
MADMT

Port Alice Pulp Export Sales
1998
Source: BC Stats, Statistics Canada
CanadaN.S. Exchange Rate- 374
Prices "FOB Point of Export From Canada"
Port Allce
Mill hpadty7
180 MADMT
s. Korea
n / (102)
25 75 100 125 150
MADMT

Port Alice Pulp Export Sales
1999
Source: BC Stats, Statistics Canada
CanadaN.S. Exchange Rate- .673
Prices "FOB Point of Export From Canada"
Port Alice
Mill Capact&
160 MADMT
Thailand
France
is .--
MADMT

Port Alice Pulp Export Sales
2000
Source: BC Stab, Statistics Canada
CanadaKI.S. Exchange Rate- .673
Prices "FOB Point of Export From Canadan
PortAlice
Mill Capacityi,
180 MA0M-r
Australia
Russla
France
(1011 \
MADMT

Port Alice Pulp Export Sales
2001
Source: BC Stats, Statistics Canada
CanadaN.S. Exchange Rate- .646
Prices "FOB Point of Export From Canada"
Pcrt Alke
Mill Cap&&&
180 MADMT
k
s.Korea
(283)
-
\
Australia
t800/ADMT-
(3m)
0 SMOIADMT-
-
a -
33
4 -
SMUADMT- 3 -
S500iADMT-
- r=
D 3
i
I mOIADMTl
.- 8
PC d
S2001ADMT- i!
-
S1WIADhlT-
if
25 50 75 100 125 150
MADMT
b

7
Estimated Grays Harbor Area Hog'rltel Supply (Average Cost) Curve
and Marginal Hog Fuel Cost Curve
July 1,2006
Assume0 continued hog fuel price
discrimination and no change in
relative returns between power
generation and beddinglfuel pellets1
sawdust pulp, etc.
.............
Thousands of Bone Dry Tons of Hog Fwl Available in the Market

ENVIRONMENTAL

LDN, 711 1/2006
Mill Environmental Status
The Cosmopolis pulpmill normally operates in compliance with existing regulations for
both air emissions and water discharges. On occasion, a permit limit is exceeded but the
events are rare and the causes are readily assignable.
The most persistent, ongoing problem (but, possibly, the least serious) is an occasional
high level of elevated level of (fecal) colifom in the mill's water effluent. About once a
year this causes the Washington Department of Health (D.O.H.) to issue a one-week
closure on Grays Harbor's commercial oyster beds. It is also possible that closures of
commercial shellfish harvest in Grays Harbor by D.O.H. could increase if wastewater
treatment practices changed with new mill management practices andlor with new
environmental staff.
The mill does face a compliance order with respect to effluent toxicity for oyster embryo
survival (chronic toxicity). Mil studies were apparently in progress on this statemandated
compliance rule but no feasible solution was as yet identified when the
company announced its intention to close the mill. Since sampling studies confirm no
impact on naturally occurring marine bivalves in the bay, and no economically feasible
solution is evident, this compliance order require no action beyond the study.
Two new regulations will soon have to be met, however. If the Cosmopolis mill operates
past November 12,2006, the mill must comply with control requirements for MACT
(Maximum Achievable Control Technology) 1. The rule requires that bleach stage
emissions must meet a lOppm limit for C12 or 0.002 lbs C12Iton. Chloroform limits and
some parametric continuous monitoring are elements of this rule. Mill personnel have
identified two low flow gas streams (CD tower vent and #1 footbox vent) that require
treatment for chlorine removal. They have estimated a cost of $100,00 to $200,000 for
compliance.
The second new rule takes effect in September, 2007 and it is referred to as boiler
MACT. This rule applies to the mill's power boiler only (MACT compliance for the
Cosmopolis Pulpmill Project- Mill Environmental Status
Page No. 1

LDN, 711 112006
recovery units has been resolved). There are several alternative criteria which could be
met. The current system cannot meet the new 'particulate' requirements but can meet the
allowable 'total select metals' criteria The only anticipated mill process change to meet
this requirement is to avoid burning the 'hog he1 (bark, etc.) fiom pulplogs that have
been borne in salt water. The hog fuel supply curve at the end of the 'Competitiveness'
section does not contain any sources that are 'contaminated' with salt water so a minimal
economic impact of compliance is assumed. This salt water concern might also limit
some future opportunities to buy pulplogs fiom sources in BC.
Clearly, at this stage, a new mill owner would wish to negotiate some relief &om the
MACT 1 timetable and would also wish to critically examine the bivalve embryo
compliance order. There would be very little ability to change the timetable for the boiler
MACT but there could be some room for flexibility with the compliance option.
The pulpmill's current federal NPDES (National Pollution Discharge Elimination
System) permit is set to expire November 1,2008 and the mill's air operating permit
expires November 15,2009. Re-issuance of these permits is a time and resource
consuming process, the outcome of which is usually more restrictive and expensive
compliance requirements. Normal permit periods are five years.
For further questions regarding the shellfish harvest closures attributed to mill operations
and possible future environmental health issues, we would refer the reader to Frank
Meriwether, Environmental Engineer, Department of Health, Food Safety and Shellfish
Program, 7171 Clearwater Lane, Building 4, P.O. Box 47824, Olympia, Washiion,
98504-7824. For fhther questions regarding the mill's previous and prospective
environmental compliance challenges, we would refer the reader to Dick Wallace,
Regional Director, Southwest Regional Office, Department of Ecology, Southwest
Regional Office, P.O. Box 47775, Olympia, Washington 98504-7775.
Cosmopolis Pulpmill Project- Mill Environmental Status
Page No.2

FINANCIAL

LDN, 7/5/2006
Mill Site Environmental Liabilities
Background
Prior to the current mill's construction, the mill was the site of Grays Harbor
Commercial Company. The Company was a large, spread out and diverse wood products
manufacturer. Undoubtedly this operation had some impact on the underlying soils
which may or may not still be detectable.
The present mill had on site two landfills, one for construction debris and one for
woodwaste (knots and tailings). Both sites were closed by 1990, following Washington
State Department of Ecology (DOE) procedures. The closures were, at that time, deemed
complete by the DOE.
The secondary treatment system for selected mill affluent streams covers several acres.
The holding and aeration lagoons in this system lack impervious linings so some
exchange with ground and surface waters has occurred (and continues to occur). No
negative consequences are known.
Minor but persistent losses of sodium hydroxide associated with the unloading process
has rendered a small portion of the site ground water alkalime. These NaOH losses were
eliminated and the alkaline water withdrawn fiom a shallow well, and discharged with
the mill effluent. This flushing is assumed to be complete by now.
A buried wood stave line carries mill effluent to the discharge area some three miles fiom
the mill proper. On rare occasion, this lie has leaked and repairs have had to be made.
No environmental consequences are known or anticipated, however leaks fiom this line
could hinder further operations.
The outfall area itself includes holding lagoons and a still open landfill. The latter
contains primary and secondary solids accumulated since mill operations began in 1957.
The fill has not been used for about 10 years. The material has all of the chemical
compounds one might expect to fmd fiom a sulphite dissolving mill of this sort. Also,
Cosmopolis Pulpmill Project- Environmental Liabilities
Page No.1

LDN, 7/5/2006
since the amount of secondary solids is quite high relative to primary solids, the surface
in uncompacted. A method of "vegetative closure" is currently in progress.
Monitoring wells near the spoils areas and storage lagoons do indicate some ground
water exchange. Groundwater in the area is brackish and not used domestically. Both
the DOE and Weyerhaeuser have apparently felt the situation to be acceptable.
Cosmopolis Pulpmill Project- Environmental Liabilities
Page No.2

Notes Regarding the Pro-forma Financial Statement
A Pro-forma Financial Statement is enclosed reporting "what if' results for the five years
2006-2010. The basis for the report includes historical data from Weyerhaeuser, our own
expert estimates and market assumptions, and research into industry data.
Although Weyerhaeuser provided summary information for 2005, they did not provide
any detail of pulp grades including sales, production, costs, etc. In 2005 and 2006,
Cosmopolis produced nearly all acetate grades. In the pro-fonna, 2006 is restated to be
"what if' Cosmopolis was being run all year as a going concern. Looking forward, it is
assumed that Cosmopolis would produce different grades as well. It is believed the
acetate opportunities for Cosmopolis will shrink in 2007 and there will not be enough
acetate demand to consume the mills capacity. It is not considered feasible to operate the
plant significantly below capacity.
This is important because Cosmopolis has been profitable in the past, manufacturing
primarily acetate grades. Other grades, which have larger market opportunities, have
lower value and negative returns to Cosmopolis. However, in order to fill the capacity,
grades which have larger markets, primarily viscose, were added to the pro-forma.
In the past 4 years, Cosmopolis produced 135,000 ADMT average per year. The proforma
assumes this production level for all years. The marketing section of this report
does not predict 13j,000 ADMT of sales. For the pro-forma, we added additionalviscose
grade sales to total 135,000 ADMT. This caused the mix of negative margin
products (viscose) to increase relative to the volume of higher margin products (acetate),
driving the pro-forma pre-tax cash results for future years down.
Pro-forma pre-tax cash results by year:
2006 $7,48 1 million
2007 ($1,163)
2008 $536
2009 $679
2010 $6,476
Acetate 84% of total ADMT
Acetate 54%
Acetate 66%
Acetate 66%
Acetate 72%
The marketing section of this report describes an optimistic case and a pessimistic case.
This pro-forma is based on the optimistic case. The difference between the two,
impacting both price and volume, is more pronounced in the years 2008-2010. The pretax
cash difference between the optimistic and pessimistic cases combined for all years is
$17.7 million.
Sales freight, discounts and commissions are estimated in the marketing section. Certain
North American customers are served by rail. Cosmopolis has no rail service. Costs
were included for the transload of trucks to boxcars by local vendors.
The sourcing plan for wood chips included in the model is discussed in a separate section.
Wood furnish for all grades is assumed to be 100% hemlock except viscose which is

assumed to be 20% alder and 80% hemlock. The purchase price in the pro-forma is
$86/bdt for hemlock and $76/bdt for alder. The amount of wood consumed for a given
amount of finished pulp produced (yield) was estimated by our expert. The wood cost in
the pro-forma is about $240 per ADMT. This value is higher than Weyerhaeuser's actual
2005 and 2006 YTD values of $189 and $213. Weyerhaeuser did not provide actual
yield or chip cost information for comparison purposes.
Manufacturing costs by grade were estimated by our expert. These were compared to
manufacturing costs for 2005 by major element, which were provided by Weyerhaeuser.
Due to the lack of detail provided by grade and cost element,-we could only compare
total costs for reasonableness. As originally estimated, the total pro-forma cost appeared
too high. Further industry information about energy costs resulted in lowering our
estimate but the pro-forma costs appear to remain conservative.
Administrative support functions including IS, Accounting, Personnel, and Marketing
were given by Weyerhaeuser to cost about $3.8 million in 2005. Weyerhaeuser did not
provide detail to support this value. We separately valued these services at slightly more
than $1 million per year.
Weyerhaeuser gave a capital spending average over the last 9 years at $4 rnm per year.
During the mill tour, many improvements had been seen in the mill and this level of
capital spending should not be necessary if no improvements are made. If improvements
are to be made in the future, logically there would be a corresponding cost reduction.
Since no cost reduction is included in the pro-forma, historical capital spending was
reduced by 50% to represent an estimate of only maintenance capital.
Property tax and insurance were estimated using outside sources. The insurance cost
estimate includes a $1 mm pollution policy to protect Weyerhaeuser in addition to a new
owner.

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Sales - Net
ADMT
$/ADMT
$000'~
Production ADMT
Manufacturing Costs
Wood
Chemicals
Packaging
Maintenance
Energy
Wages
Salaries
Other
lnvty (Inc) Dec
Total Mfg
% of sales
Manufacturing Margin
% of sales
Other Costs
G&A $
Capital Spending (Depr in 05) $
Property Tax $
Insurance $
Total Other $
2005 Act 1
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010
Pre-tax Cash $ 2.020
Prepared by: SDO

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 1 2010 I
Sales by Customer
Daicel
MACll
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Trucell
ADMT
Gross Price
Discount %
Commission %
Freight $/ADMT
Net Price
Net Sales $000'~
Total Daicel$000's
RhodiaINA
Weycell
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Preoared by: SDO
Page I

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010
Voridian
MAC
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Trucell
ADMT
Gross Price
Discount %
Commission %
Freight $/ADMT
Net Price
Net Sales $000'~
Total Voridian $000'~
CelaneselCand.
MAC
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Prepared by: SDO Page 2

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption = weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 1 2010
CCPlOthers
PH
ADMT
Gross Price
Discount %
Commission %
Freight $/ADMT
Net Price
Net Sales $000'~
Nantong
Weycell
ADMT
Gross Price
Discount %
Commission %
Freight $/ADMT
Net Price
Net Sales $000'~
FMC
PH
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Prepared by: SDO
.-
Page 3
~-

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
ASlA
Fluff
ADMT
Gross Price
Discount %
Commission %
Freight $/ADMT
Net Price
Net Sales $000'~
Ethers
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
ASlA
Viscose
ADMT
Gross Price
Discount %
Commission %
Freight $lADMT
Net Price
Net Sales $000'~
Sub-total
ADMT
Net Price
Net Sales $000'~
Prepared by: SDO Page 4

Costnopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption = weak USD, problems at Pt Alice and Bacell
2006 1 2007 I 2008 I 2009 I 2010
Fill in to hit full production - 135,000 ADM'
VISCOSE
ADMT
Gross Price
Discount %
Commission %
Freight $/ADNIT
Net Price
Net Sales $000'~
Pre~ared by: SDO Page 5
-

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and ASSU~D~~O~S
Economic Assumption = weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010
Total Sales ADMT
MAC
MAC I1
Weycell
Trucell
PH
Fluff
Ethers
Viscose 17.000 52,500 36,500 36:000 28,000
Total 135,000 135,000 135.000 135,000 135,000
Total Sales $lADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers $ - $ 1,005 $ 1,005 $ 1,005 $ 1.005
Viscose $ 666 $ 666 $ 666 $ 666 $ 686
Total $ 867 $ 783 $ 802 $ 803 $ 849
Total Sales $000'~
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose 11,329 34,986 24,324 23,990 19.208
Total 116,989 105,709 108,250 108.419 114.639
PreDared by: SDO
Page 6
L

~
Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 1 2007 1 2008 1 2009 1 2010
Production ADMTlDay rates
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose 385 385 385 385 385
Average 378 383 382 382 381
Days Run - calculated
MAC 96 32 48 48 48
MAC II 128 66 66 66 80
Weycell 48 72 96 96 96
Trucell 32 19 21 21 27
PH
Fluff
9 24 24
-
24
-
24
-
Ethers 4 4 5 8
Viscose 44 136 95 93 73
Total 357 353 354 354 354
Prepared by: SDO Page 7

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption = weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010
Wood Furnish
Wood Cost - per Roy Nott
$IBDT - Hemlock $
$IBDT - Hardwood $
Yield ADMTIBDT - per Truman Seeley
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Chips BDT -calculated
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Hemlock (80%)
sub-total Hemlock
Hardwood (20% of Viscose)
Total BDT
Prepared by: SDO
Page 8
-

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010
Chips $lADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $/ADMT
$000'~
Chemicals - per Truman Seeley
$/ADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $lADMT
$000'~
Prepared by: SDO
Page 9

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 1 2010
Energy
$/ADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $/ADMT
$1011 Day
$000'~
Packaging
$IADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $/ADMT
$000'~
Preoared by: SDO
Page 10
-~

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010 1
Mtce
$lADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $IADMT
$lop Day
$000'~
Wages
$IADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $lADMT
$lop Day
$000'~
Pre~ared by: SDO
Page 11
.-

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
I 2006 I 2007 I 2008 I 2009 1 2010
Salaries operating salaries only
$lADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $/ADMT
$/Gal Day
$000'~
Other Manufacturing
$lADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average $IADMT
$/Gal Day
$000'~
Prepared by: SDO Page 12

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 I 2008 I 2009 I 2010 I
Other Cash Costs
IT Accounting HR Marketing
Capital Spending
Property Tax
Insurance
Total Other Cash Costs
Total Manufacturing Cost
$/ADMT
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Average
Total Manufacturing Margin $/ADMT
$lADMT
MAC $
MAC II $
Weycell $
Trucell $
PH $
Fluff $
Ethers $
Viscose $
Average $
Pre~ared by: SDO
-
'./
Page 13

Cosmopolis Pulp Mill
Pro-forma Financial Statement
Details and Assumptions
Economic Assumption =weak USD, problems at Pt Alice and Bacell
2006 I 2007 1 2008 I 2009 I 2010 1
Total Manufacturing Margin $000'~
$000'~
MAC
MAC II
Weycell
Trucell
PH
Fluff
Ethers
Viscose
Total
Pre-tax Cash
Prepared by: SDO
Page 14

ALTERNATIVES

LDN, 71512006
Potential Site Alternatives
Overview
Our consulting team has been asked to consider other uses for the Cosmopolis mill
facilities and site if the option of continuing the current pulpmill operation isn't deemed
feasible. We have chosen to focus on uses that would employ some of the mill's existing
human resources, infrastructure and the utility services that are already in place. The
possibilities examined include:
1. Stand-alone bio-fueled power generating plant (this was covered in another report
which was shared with the Advisory Committee on June 29,2006)
2. A power generating plant with a residual heat user located on-site
a. Fish rearing facility
b. Lumber dryiig kilns
c.
3. Existing mill and process reconfigured for ethanol (and methanol) production
4. Solvent process pulpmill with both pulp and chemical products
Other, more general uses of the site can, of course, be imagined (e.g. warehousing, cross-
docking/distribution, etc.) but we have chosen to focus on potential uses that might best
exploit the facility's more unique attributes.
The Mill as an Ethanol Plant
In the simplest conversion to an ethanol plant, the mill's brown stock system and
recovery system would remain substantially intact. The red liquor from the cooking
process would go through a fermentatioddistiuation plant for ethanol production and
then on to the current recovery system. Meanwhile, the washed pulp would go through a
process called 'cellulose hydrolysis' which would create a solution of simple wood
sugars in water. This solution would then, in turn, go through a conventional
fermentation and distillation step to produce ethanol, with part of the water recycled and
part routed to the mill's current treatment system.
Cosmopolis Pulpmill Project- Potential Site Alternatives
Page No. 1

LDN, 7/5/2006
For a mill the size of Cosmopolis, the maximum theoretical yield of ethanol is roughly 37
million gallons per year. The more probable, realistic yield would likely be about 26
million gallons per year. This assumes the consumption of roughly 400,000 BDT'sIyear
of wood. The current ethanol price, likely driven by tax incentives, an oxygenated fuel
mandate, high petroleum prices and the current, general enthusiasm for bio-fuels, is
roughly $2.50/gallon. At 26 million gallons per year, this suggests a gross revenue of
about $65 million per year or roughly 55% of the current pulpmill revenue stream. This
earnings stream might be enhanced slightly by sales of other by-products such as
methanol and furfixal. The mill's impact on ethanol market pricing would likely be
negligible- the quantity produced would amount to less than .4% of the U.S. demand for
ethanol in an El0 gasoline mix.
While the projection of revenues may seem somewhat disappointing, it does not
necessarily mean that this business would be a 'loser'. Compared to the pulpmill
operation, this new operation would essentially replace the pulp machine and bleach plant
operations with hydrolysis, fermentation and distillation. With this configuration, the
headcount requirement and chemical and energy costs should all be substantially reduced
and the facility should have considerable feedstock flexibility (compared to a dissolving
pulpmill), even permitting the use of species like hybrid cottonwood.
Substantial new capital investment would be required for the fermentation and distillation
processes but both are pretty well developed technologies. The technology that is not
well developed, on a commercial, larger scale basis, is cellulose hydrolysis. There are
three known routes to the complete (or nearly complete) hydrolysis of cellulose: 1)
concentrated acid hydrolysis, 2) dilute acid hydrolysis and 3) enzymatic hydrolysis. All
three approaches have advantages and problems. Commercial concentrated acid
hydrolysis requires recovery and re-concentration of the acid, a nasty step, to put it
mildly. Dilute acid hydrolysis is hard to drive to completion. Enzymatic hydrolysis is
apparently not economically feasible at present.
Because this option would require a very substantial new capital investment ($50
million) and it would involve a critical process step (hydrolysis) that still seems to need
substantial technological development, this clearly has the nature of a development
project, a project that won't likely be undertaken without the support of a very risk-
tolerant source of capital or some consortium or government agency.
Cosmopolis Pulpmill Project- Potential Site Alternatives
Page No.2

Adding Ethanol Manufacture to the Existing
Cosmopolis Mlll
. -.-
Sulphiie Pulping Enzymatic or Acid Fermentation
and Washing
Hydrolysis of Pulp
Fermentation
Ethanol Distillation
-

Adding Ethanol Manufacture to the Existing
Cosmopolis Red Liquor System
Distillation
Yeast and .
Nutrients
u
Ferrnentors
Yeast
eparatio

LDN, 7/5/2006
Bv-Product Ethanol Production
One additional, important point should be made before we conclude our discussion of
ethanol production opportunities at Cosmopolis. Ethanol production fom this mill could
occur in one of two ways, either as a by-product or (as mentioned in this revicw of mill
alternatives) as a primary product. The by-product option involves the fermentation of
the red liquor part way through the liquor evaporation process. This isn't 'brain surgery1-
sulfite mills have been doing this since the 1940's. The only unanswered question is
whether there is some problem of compatibility with the mill's magnesium base. Most (if
not all) of the mills that do this are calcium-based. Truman doesn't think this should be a
problem but it needs to be studied. Probable mill ethanol yield, under this by-product
ethanol option, is likely on the order of between 4 and 5 million gallons per year which
(using the assumptions made previously) implies an incremental revenue stream of
between $7 and $12 million. There may be some operating cost impacts of this approach
but the big cost item- the chip cost- would obviously be unaffected.
Truman has suggested that, ifhe were still running the mill and he wasn't under corporate
orders to shut it doym, 'he would be all over this one7. In addition to this valuable new
revenue stream, this option might even permit some incremental mill recovery
debottlenecking. Theoretically, this might permit the mill to make a modest (3%)
throughput improvement.
In the primary ethanol product mode, there would be two separate fermentation lines, one
for red liquor and one for the hydrolyzed pulp sugars. We haven't identified a way to
combine them.
Comvetitive Methods of Ethanol Manufacture
Ethanol may be synthesized from petroleum, a proven approach once dominant for
industrial purposes but now seldom mentioned. Most of the bio-fuel ethanol that is now
produced in the U.S. is made by fermentation of feed corn. With a typical yield of 2.7
gallons per bushel and corn prices ranging from $2.00 to $3.50 per bushel, the raw
material costs are pretty comparable to wood (see attached ethanol feedstock cost
analysis). The operating costs for producing ethanol from corn are substantial because
the starches must be enzymatically degraded to sugars before fermentation.
Cosmopolis Pulpmill Project- Potential Site Alternatives
Page No.5

Ethanol is produced in Brazil by fermentation of sugar cane juice, a somewhat simpler
process. This process is reportedly uneconomical in the U.S. because of subsidized sugar
prices. Furthermore, the Brazilian export of ethanol to the U.S. is apparently uneconomic
because of substantial tariff barriers.
Ethanol Feedstock Cost Analysis
A. Ethanol from corn
1. Corn yield per acre (US average)- 139 bushelslacre
2. Ethanol yield eom corn- 2.7 gaybushel
3. Current feed corn price range- $2 to $3.50/busheI
4. Therefore, $/gallon for ethanol fiom feed corn- $.74 to $1.30/gallon
R. Ethanol from wood
1. Assume utilization of only hexose sugars in fermentation
2. Most woods are roughly 60% hexose sugars
3. Theoretical yield eom anaerobic metabolism of hexose is 57% by mass
4. Price of wood is $60 to $100/BDT
5. Wood yield per acre is about 4 BDTIacrelyear
6. Ethanol density is 0.789 kg/m3 or 6.581 pounds/gallon
7. So, at 100% of theoretical yield, feedstock wst range is:
8. Limited data available suggests a recovery vs. theoretical on the order of
70%, implying a feedstock cost range of $.93 to $1.54/gallon.
9. Yield per acre corresponding to a 4BDTlacrelyear growth rate, a hexose
content of 60% and a yield of ethanol at 70% of theoretical is:
Cosmopolis Pulpmill Project- Potential Site Alternatives
Page N0.6

LDN, 7/5/2006
Conclusion: In the 'contest' between corn and wood, the favorable energy balance for
wood should offset a slight corn feedstock cost advantage, Corn by-products may swing
the balance back. The 'devil is in the details'. For further information, see the article
attached at the end of this section entitled, 'The 2001 Net Energy Balance of Corn'.
The Bio-Refinem Pul~mill
In this concept, the mill's basic process is altered. Sulfite pulping is replaced by an
organic solvent step, possibly catalyzed, to accomplish the basic pulping. Most of the
lignin and hemicellulose from pulping winds up in solution and the pulp continues along
as it currently does for further processing. Lignin and hemicellulose are separated,
usually by precipitation of the Iignin, and the lignin is recovered as a saleable by-product.
The hemicellulose can be fermented to ethanol. The conventional chemical recovery step
is eliminated.
Processes such as these have reached the semi-commercial stage in the past and then
failed for various reasons. One reason is poor product defmition. Exactly where and to
whom does one sell precipitated lignin We, at Paneltech, would have an interest in this
lignin as a phenol replacement for PF resins but, once again, the 'devil is in the details'.
Furthermore, the ethanol that was produced was not an economically desirable product
until quite recently. Finally, and perhaps most importantly, the pulp from these processes
have proven to be inferior to the more 'normal' pulps. Capital costs and technology
problems are significant but there
fiding a demonstration site.
companies that have expressed an interest in
The Mill as a Stand-Alone Power Generating Paeilitv
A separate report, exploring this subject more fully, has been prepared and distributed to
the Advisory Committee.
Cosmopolis Pulpmill Project- Potential Site Alternatives
Page No.7

THE 2001 NET ENERGY BALANCE OF CORN-ETHANOL
Hosein Shapouri*, U.S. Department of Agriculture (USDA), Office of the Chief
Economist (OCE), 300 7" Street SW., Room 361, Washington, D.C. 20024, telephone:
202 401 053 1, James Duffield, USDAIOCE, Andrew McAloon, USDAIAgricultural
Research Service (ARS), Eastern Regional Research Center, 600 East Mermaid Lane,
Wyndmoor, PA. 19038, and Michael Wang, U.S. Department of Energy, Center for
Transportation Research, Energy Systems Division, Argonne National Laboratory, 9700
South Cass Avenue, Argonne, IL. 60439
ABSTRACT
This report estimates the net energy balance of corn ethanol utilizing the latest survey of
U.S. corn producers and the 2001 U.S. survey of ethanol plants. The major objectives of
this report are to improve the quality of data and methodology used in the estimation.
This paper also uses ASPEN Plus, a process simulation program, to allocate total energy
used to produce ethanol and byproducts. The results indicate that corn ethanol has a
positive energy balance, even before subtracting the energy allocated to by products.
The net energy balance of corn ethanol adjusted for byproduct credits is 27,729 and
33,196 Btu per gallon for wet- and dry-milling, respectively, and 30,528 Btu per gallon
for the industry. The study results suggest that corn ethanol is energy efficient, as
indicated by an energy output/input ratio of 1.67.
Keywords: Corn-ethanol, energy inputs, dry-and wet-milling, net energy balance
INTRODUCTION
USDA's net energy balance of corn-ethanol was published in 1995,2002, and 2003 in the
American Society of Agricultural Engineers (ASAE), Shapouri et al. Since 1970, many
authors have studied the net energy balance of corn-ethanol. The major objective of this
report is to improve the general estimation procedure. These improvements include: (1)
regular updating of the estimates based on the latest data on corn production and corn
yield, (2) improving the quality of estimates for energy used in manufacturing and
marketing nitrogen fertilizer, (3) improving the quality of estimates for energy used to
produce seed-corn, and (4) enhancing the methodologies used in allocating the energy
used in ethanol production (to byproducts and ethanol). In contrast to three previous
studies, all energy inputs are reported in low-heat value (LHV).
During the past 2 years, David Pimentel, 2003, Tad Patzek, 2003, and Andrew Ferguson,
2003, criticized USDA's studies of the net energy balance of corn ethanol. It is argued
that USDA underestimates energy used in the production of nitrogen fertilizer and the
energy used to produce seed-corn, over estimating the energy allocated to produce cornethanol
byproducts. They also argued that USDA excludes energy used in corn irrigation
and secondary energy inputs used in the production of corn, such as farm machinery and

-
equipment and cement, steel, and stainless steel, used in the construction of ethanol
plants.
THE NET ENERGY BALANCE
This paper, unlike the Dr. Pimentel report, 2003, is based on straightforward
methodology and highly regarded quality data from the 2001 Agricultural Resource
~anagement ~urvei (AM),
Economic Research Service, EGAJSDA, 2001
Agricultural Chemical Usage, and 2001 Crop Production, National Agricultural Statistics
Service, NASSIUSDA, and the 2001 survey of ethanol plants.
Direct energy used on farms, such as gasoline, diesel, LP gas (LPG), natural gas, and
electricity, for the production of corn, including irrigation by States from 2001 ARMS,
are available on the ERS Web site. The number of seed-corn planted per acre in 2001,
custom work expenditure, tons of lime used per acre, and purchased water were also fiom
the 2001 ARMS. Quantities of fertilizers and pesticides used per acre of corn in 2001
were published by NASS. Although corn is produced in every State, we focused our
analysis on the major corn-producing States: Illinois, Indiana, Iowa, Minnesota,
Nebraska, Ohio, Michigan, South Dakota, and Wisconsin. In 2001, these nine States
accounted for 79 and 92 percent of U.S. corn and ethanol production, respectively.
Corn yield is a critical part of the net energy batance estimation. Although the corn yield
has been rising over time, the annual variation is very volatile. Therefore, we used a 3-
year average yield instead of the average yield for the survey year. The 2000-02
weighted average corn yield in each State was used to convert farm inputs from a per acre
basis to a per bushel basis (2001 Crop Production, NASS). Table 1 shows the uine-State
energy input data per acre of corn and nine-State weighted average for the 2001 ARMS.
Table l--Energy-related inpuls used to grow mrn in nine States and nlneState weighted average, 2001
9-State
Weighted
IL IN IA MN NE OH MI SD WI average
Meld 2000-02
average Bushelslacre 146.31 141.85 152.06 144.35 133.66 125.8 114.78 105.82 131.48 139.34
Seed
Fertilizer:
Nitrogen
Potash
Phosphate
Lime
Energy:
Diesel
Gasoline
LPG
Electdcity
Natural Gas
Custom work
Chemicals
Kernelslaue
poundslacre
poundslam
poundslam
poundslecce
Gallonslacre
Gallonslaue
Gallonslacre
k\nmlacre
Cubic Wscre
DolJacre
Poundslam ~~
- ~~
Purchesed water Dol.lacre 0 0 0 0 1.2 0 0 0 0 0.18
Source: USDA. Emnomic Research Service and Office of Energy Policy and New Uses.

In previous studies, we assumed that energy used to produce seed-corn is equal to 1.5
times the energy used to produce corn. The review of literature and comments on our
reports indicated that seed-corn production requires more energy because the seed-corn
yield per acre is low and requires a considerable amount of electrical energy to process
seed-corn including drying, shelling, grading, cleaning and storage. Based on an
unpublished report prepared by Michael Graboski, 2002, for the National Corn Grower
Association, the energy required for growing and processing seed-corn is estimated at 4.7
times that required for production of corn. The factor of 4.7 is used in this study.
The amount of energy used to produce a pound of nitrogen has been estimated in several
studies. The values range from 18,392 Btu of high heat value (HHV) per pound,
Shapouri et al, 2002, to over 33,590 Btu LHV per pound, Pimente12003. For this report,
we asked Keith Stokes, President of the Stokes Engineering Company and fertilizer
expert, to estimate the energy used in the production of nitrogen, phosphate, and potash
fertilizers. His estimates of energy used (LHV) to make and deliver nutrients are 24,500
Btu per pound ofN, 4,000 Btu per pound of P205, and 3,000 Btu per pound of K2O.
The energy used to produce herbicides and insecticides are from Wang et a1.1999, the
Greenhouse Gas Regulated Emissions and Energy Use in Transportation (GREET)
model, Argonne National laboratory. More than 153,000 Btu of energy is required to
produce a pound of herbicides, and about 158,000 Btu of energy is required to produce a
pound of insecticides. A weightcd average of over 154,000 Btu of energy is used per
pound of pesticides. Farm-related energy inputs are converted per bushel and then to Btu
of energy per bushel of corn by multiplying each input by its LHV. The energy required
for hauling these inputs to farms, excluding fertilizer, was also estimated. The energy
used to produce fertilizers includes energy used to deliver fertilizer to farm. The total
energy requirements for farm inputs are given in Table 2.
The energy associated with transporting the corn from local storage facilities to ethanol
plants was estimated by the GREET model. The average energy used for transporting a
bushel of corn was 5,636 Btu or about 2,120 Btu per gallon of ethanol.
Ethanol production facilities include both dry- and wet-milling operations. Dry mills are
usually smaller than wet mills and are built primarily to produce ethanol. Wet mills are
bio-refineries and produce a wide range of products such as ethanol, high fructose corn
syrup (HFCS), starch, food and feed additives, and vitamins. Thermal and electrical
powers are the main types of energy used in both types of processing plants. Wet mills
usually generate both electrical and thermal energy from burning natural gas or coal. Dry
mills use natural gas to produce steam and purchase electricity from a utility.
The energy used to convert corn to ethanol is based on a U.S. survey conducted in 2001
by BBI International. On the average, dry mill ethanol plants used 1.09 Kwh of
electricity and about 34,700 Btu of thermal energy (LHV) per gallon of ethanol. When
energy losses to produce electricity and natural gas were taken into account, the average
dry mill ethanol plant consumed about 47,116 Btu of primary energy per gallon of
ethanol produced. Wet mill ethanol plants that participated in the survey used 49,208

Table 2-Total enerqv requirements of farm inDuts for nine State and ninedtate weiqhted averaqe, 2001
9-State
Weighted
IL IN IA MN NE OH MI SD W1 average
BTUibushel
Seed 525 557 451 512 804 780 827 623 548 603
Fertilizer
Nitmgen 25876 25446 20147 19305 24146 32764 26792 25257 19864 23477
Potash 2395 2798 1356 1285 474 2670 2669 907 1278 1899
Phosphate 2211 1897 1508 1283 1053 2142 1745 1721 1139 1631
Lime 76 79 73 0 0 89 97 0 255 63
Eneroy:
Diesel 3853 4941 4609 5700 14136 5207 9558 6336 8576 7491
Gasoline 1478 2135 1138 1698 2266 1834 3141 2044 1536 3519
LPG 1644 1938 4067 5058 2635 3823 2694 406 1241 2108
Elecbicily 614 1868 1035 1739 10685 744 2081 2425 470 2258
Natural Gas 550 1063 0 332 7544 1363 2033 69 986 1846
Custom work 2001 1197 1417 1294 1291 1434 1859 1913 2526 1581
Chemicals 3453 3464 2877 2134 2501 4530 4227 2664 2542 2941
Purchased water 0 0 0 0 946 0 0 0 0 136
Input hauling 143 167 178 176 242 209 254 121 251 202
Total 44821 47551 38856 40516 68723 57590 57977 44486 41212 4975%
\--dl
Btu per gallon of natural gas and coal, on average, to produce steam and electricity in the
plants. After adjustments for energy losses to produce natural gas and coal, on the
average, a wet mill ethanol plant used 52,349 Btu of energy to make a gallon of ethanol.
The average energy associated with the transport of ethanol from ethanol plants to
refueling stations was estimated by the GREET model. The average energy used for
transporting a gallon of ethanol was 1,487 Btu per gallon for both dry and wet milling.
The production of ethanol comes with a range of byproducts, such as distillers dried
grains with soluble (DDGS) in the dry milling operation, and corn gluten feed (CGF),
corn gluten meal (CGM), and corn oil in the wet milling process. The energy used to
produce corn and convert corn to ethanol, including hauling corn from farms or grain
elevators to ethanol plants, should be allocated to ethanol and byproducts.
In the previous studies, we used a replacement method to allocate total energy to ethanol
and byproducts. For this report, we used ASPEN Plus, a process simulation program, to
allocate the energy used in the plants to ethanol and byproducts. On the average, 59 and
64 percent of the energy used to convert corn to ethanol is allocated to ethanol in dry- and
wet-mills respectively.
Energy is used to produce and transport corn to ethanol plants allocated to starch and
other corn kernel components, such as fiber, germ, and protein. Only starch is converted
to ethanol. On the average, starch accounts for 66 percent ofthe corn kernel weight (15
percent moisture). Therefore, 66 percent of energy used to produce and transport corn to
ethanol plants is allocated to ethanol and 34 percent to byproducts.
Energy used in the production of secondary inputs, such as farm machinery and
equipment used in corn production, and cement, steel, and stainless steel used in the

construction of ethanol plants, are not included in our study. Available information in
this area is old and outdated. Pimentel, in his latest report (2003), used the 1979 Slesser
and Lewis to estimate the energy used in the production of steel, stainless steel, and
cement.
RESULTS
A11 energy inputs used in the production of ethanol is adjusted for energy efficiencies
developed by GREET model. The estimated energy efficiencies are for gasoline (80.5
percent), diesel fuel (84.3 percent), LPG (98.9 percent), natural gas (94 percent), coal (98
percent), electricity (39.6 percent), and transmission loss (1.087 percent). After adjusting
the energy inputs by these energy efficiencies, the total estimated energy required to
produce a bushel of corn in 2001 was 49,753 Btu.
Table 3 summarizes the input energy requirements, by phase of ethanol production on a
Btu per gallon basis (LHV) for 2001, without byproduct credits. Energy estimates are
provided for both dry- and wet-milling as well as industry average. In each case, corn
ethanol has a positive energy balance, even before subtracting the energy allocated to
byproducts.
Table 4 presents the final net energy balance of corn ethanol adjusted for byproducts.
The net energy balance estimate for corn ethanol produced from wet-milling is 27,729
Btu per gallon, the net energy balance estimate for dry-milling is 33,196 Btu per gallon,
and the weighted average is 30,528 Btu per gallon. The energy ratio is 1.57 and 1.77 for
wet- and dry-milling, respectively, and the weighted average energy ratio is 1.67.
Table 3--Energy use and net energy value per
gallon wi!hout mproduct energy credits, 2001
Milling process Weighted
Production process Dry Wet average
Btu per gallon
Corn production 18875 18551 18713
Corn transport 2138 2101 2120
Ethanol mnvenion 316.- 52349 49733
ethanol distribution 1487 1487 1487
Total energy used 69616 74488 72052
Net energy value 6714 1842 4278
Energy ratio 1.10 1.02 1.06
Tabie 4-Energy use and net energy value per
gallon with mpioduct energy credits, 2001
Milling process Weigted
Produciion process Dry Wet average
Btu per gallon
Corn production 12457 12244 12350
Corn transport 1411 1387 1399
E!hanoi mnvenion 27799 33503 30586
ethanol distribution 1467 1467 1467
Total energy used 43134 48601 45802
Net energy value 33196 27729 30528
Enerqv ratio 1.77 1.57 1.67
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